June 29, 2011

The PV Module Supply Glut

Tom Konrad CFA

With project financing and plenty of
photovoltaic (PV) modules, a shortage of projects with credible
off-takers seems likely to lead to further falls in module
prices. How can investors best profit from this trend?

PV module prices
have dropped 70% since 2008, when the financial crisis sent demand
tumbling, with Chinese multicrystalline silicon module prices currently
as low as $1.49 per watt, according to Bloomberg
New Energy Finance's (BNEF) Solar Spot Survey. In part, this was
an example of “the Bubble giveth,
and the Bubble taketh away.” For the three to four years ending
in 2008, the long-term downtrend of PV prices, which had been driven by
the learning curve and imporving technology, stalled due to strong
demand. Then,
when the financial crisis suddenly removed the availability of cheap
financing, demand vanished, and prices plummeted.

Plenty of Money

Today,
it's
clear that financing is back. I recently attended the 8th
Annual Renewable Energy
Finance Forum-Wall Street (REFF), co-hosted by the American Council on Renewable Energy
(ACORE) and Euromoney Energy Events. At REFF, the room was packed
with
financiers ready to fund PV projects with credible developers and
quality off-takers, such as utility Power Purchase Agreements (PPAs),
solar and wind developers, and attorneys ready to draw up deals between
them. Notably
absent
among
attendees
were any utilities or other
large power
buyers.

I find the absence of power buyers telling. Yes, there are
utilities, businesses, and institutions signing PPAs with renewable
energy developers, but it's a sign of the end-customer's market power
that they don't need to come to networking events like REFF Wall St to
get the word out. Brian
Matthay, VP Environmental Finance at Wells Fargo sees the
distributed solar PV market as limited not by the supply of panels or
finance, but by the lack of good deals. For Wells Fargo, a good
deal requires a quality developer, with experience and a strong balance
sheet.

Wind is following a similar pattern. According to Pat
Eilers, Managing Director at Madison Dearborn Partners who spoke at
the conference, the locations of new wind projects in the US is driven
more by the availability of PPAs than the wind resource. I even
met a wind developer who is following a new model because of the lack
of PPAs with favorable pricing, his firm is building wind farms to sell
electricity into the spot market: They don't intend to sign a PPA until
pricing becomes more favorable.

Plenty of PV Modules

Meanwhile, PV
module supply continues to grow rapidly. According to BNEF's
projections, even an optimistic projection
for PV demand is likely to fall short of supply in 2012 and 2013.

We last had a PV
module oversupply in 2009, after the financial crisis destroyed many
customers' ability or willingness to borrow leading to a rapid fall in
demand.
Prices promptly fell, which in turn lead to a rapid resurgence in
demand. After falling short in 2009, demand slightly exceeded
supply in 2010. In other words, over a period
of
about a year, PV demand has shown itself to be remarkably elastic and
quick to respond to falls in the price of PV.

Potential Sources of Demand

I expect the
current and projected glut of solar modules will create lower prices
and a new demand boom. BNEF's projections for demand in 2012 and
2013 will likely prove to be too conservative, although many PV
manufacturers will be unable to make a profit at the lower price levels.

Market power will
shift from
solar manufacturers to solar customers. The biggest
winners are likely to be end users, who will be able to get solar
installations for much lower prices than ever before, and those solar
installers able to reach out to the new classes of customers.

Where will the
demand come from? According to J
Andrew
Murphy, Executive Vice
President of NRG Energy, it will come from the maturation of the
industry. He sees a growing customer awareness of electricity and
where it comes from, many more companies such as Wal-Mart, Google
(GOOG),
and Whole Foods are not only investing in distributed generation
themselves, but presenting it to their shareholders and customers as
a value proposition. Those stakeholders, seeing that value
proposition then see the value in adopting distributed generation,
which usually means PV.

If there is a profitable opportunity in solar stocks, it will be in the
stocks of developers able to adapt to the needs of the new classes of
solar customers drawn in by rapidly falling prices. I believe
that solar manufacturers see this, and that's why many are integrating
vertically down the value chain by buying up solar developers, such as Sharp's
(SHCAY.PK)acquisition
of
Recurrent
Energy, and First
Solar's (FSLR)purchase
of
NextLight last year.

A more recent development was the merger of two of the strongest
regional solar developers, when Real
Goods
Solar
(RSOL) agreed to merge
with
leading
Northeastern
solar
integrator
Alteris in an all-stock
deal. As prices fall, typical customers are more likely to want a brand
they can trust and a one-stop shop for design, build, and
financing. I expect
solar integrators such as Real Goods that have a history of
successful acquisitions should do well, along with strong local
brands. But that does not mean that Real Goods' current high
trailing P/E of 38 is justified. Solar integration is a low
margin business, and growth from all-share acquisitions such as that of
Alteris comes at the price of dilution of existing stock holders.
As I concluded in my recent
survey of solar industry integration, the industry is more likely
to produce steady cash earners than high-margin, quickly growing high
flyers.

Conclusion

While I expect the downstream portions of the solar industry to be
solid earners over the next few years due to the rapid growth of the
industry, that growth does not justify paying high multiples for a low
margin business. If I had to pick a solar stock today, I'd be more
likely to opt for the higher margin vertically integrated manufacturers
which are currently trading at depressed prices due to the current
glut. My colleague Garvin Jabush considers Wall
Street's
current
hatred
of
solar
stocks to be irrational. It's not
that he thinks module prices will not fall, but that such a fall in
prices is more than adequately reflected in stock valuations. I'm
inclined to agree.

While Real Goods has only a 2.6% operating margin, and a 4.0% return on
equity (ROE), it trades at a forward P/E of 11 based on 42% expected
annual
growth in revenue. Among manufacturers, cost leader First Solar
trades at an 11 P/E, but has a 28% operating margin and 19% return on
equity, numbers which seem much better able to fund the 27% expected
annual revenue growth internally. Jabush's
pick, LDK
Solar (LDK), is also a vertically integrated
manufacturer/developer, and has a forward P/E of a minuscule 2.9, based
on
no expected profit growth and 12% annual revenue growth, which can
easily be funded by the company's 20% operating margin and 38% return
on equity.

It's always useful to understand future trends in the market, but
profits come from understanding the market's reaction to these trends,
as well as the trends themselves. Right now, investors seem
spooked by solar manufacturers, even though many of these manufacturers
have worked to integrate vertically along the supply chain making them
less sensitive to shifts in market power along the supply chain.

Too often, investors in Renewable Energy get carried away by a positive
growth story, rushing to buy at any price. This time, the
opposite seems true, and it's the selling that seems to have gone too
far. I've never been a solar cheerleader, and have always been
cautious about confusing
the
growth
of
the
industry
with opportunity for the existing companies.
Yet
right now, many solar stocks seem priced for long term zero, or
even negative growth. That, to me, seems to be taking the case
too far.

DISCLOSURE: No positions.

DISCLAIMER: Past performance
is
not a guarantee
or a reliable indicator of future results. This article contains
the current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment
advice or a recommendation of any particular security, strategy or
investment product. Information contained herein has been

June 28, 2011

Johnson Controls Forecasts Enormous Stop-Start Growth

John Petersen

On June 27th Johnson Controls (JCI)
hosted their 2011
Power Solutions Analyst Day and unveiled their expectations
for the future of stop-start idle elimination systems. After noting
that all automakers are developing a range of powertrains, JCI used
this graph to emphasize their view that the overwhelming bulk of
alternative powertrain vehicles over the next five years will have
simple, cost effective and fuel efficient stop-start systems.

You don't see much about stop-start systems in the mainstream media
because politicians and reporters are too enchanted with plug-in
vehicles and other exotica to deal with mundane issues like purchase
prices and payback periods, but JCI has made it crystal clear that
its meat and potatos business over the next five years will be
cheap, not cool.

JCI's estimates for market growth over the next ten years were
equally impressive, particularly when you realize that the advanced
energy storage systems required for stop-start generate twice the
per unit revenue and three times the per unit margins of flooded
lead-acid batteries. It's a manufacturer's dream come true, stable
unit volumes with rapidly increasing revenues and margins.

In their presentation JCI explained that the three key
attributes of energy storage systems for stop-start are:

Cycling – reliable
system charge/recharge cycles over time;

Useable energy – range
of stored energy that can be used to optimize the system; and

Charge acceptance –
rate of recharge to maximize opportunity capture.

It ties perfectly to a joint
presentation from BMW and Ford at last fall's European Lead
Battery Conference where the two automakers explained why the
stop-start duty cycle is so hard on conventional batteries. In a
normal vehicle, you start the engine at the beginning of the trip
and turn it off at the end. In a car equipped with stop-start, the
engine turns itself off automatically every time the car is stopped
and restarts automatically when the driver takes his foot off the
brake. While the difference between one start per trip and one start
per mile is enormous, a more critical problem arises from the fact
that stop-start systems require the battery to carry all accessory
loads during frequent engine off intervals.

In the segment of the BMW-Ford presentation that quantified a
typical stop-start duty cycle, the accessory load was 50 amps for 60
seconds, or about 3,000 amp seconds while the starter load was 300
amps for one second. In other words, the accessories accounted for a
whopping 91% of total load. Their graph of AGM battery performance
over time shows that charge acceptance (the downward curving blue
line) plummets as the battery ages while the time required to
recover from an engine off event (the upward curving red line) soars
from 30 seconds to three minutes or more.

Since all systems are designed to disable the stop-start
functionality until the battery has recovered an acceptable state of
charge, system efficiency falls off rapidly as the battery ages. The
automakers want and need something better than AGM batteries, the
principal solution that old line auto battery manufacturers like JCI
want to provide.

The first advanced technology introduced for stop-start systems was
developed by Continental
AG in cooperation with Maxwell Technologies (MXWL)
for use in diesel stop-start systems from Peugeot. In this dual
device configuration an AGM battery carries the accessory load and a
supercapacitor module carries most of the starter load. It insures a
reliable engine restart, but can't do much about the bigger problem
of accessory loads. Contiental and Maxwell expect that their system
will be installed in up to a million Peugeot vehicles in the next
three years. If the system works well for Peugeot and stop-start
vehicle sales ramp as rapidly as JCI expects them to, implementation
rates will probably be higher.

A second advanced technology solution for stop-start systems is a
third generation lead-acid-carbon hybrid that's being developed by
Axion Power International (AXPW.OB),
which hopes to begin a commercial roll-out of its PbC battery later
this year. In a joint
presentation by BMW and Axion at last fall's ELBC, the
performance differences were obvious. The graph that tracked PbC's
performance over time using the BMW-Ford test protocol showed that
charge acceptance (the flat blue line) stayed stable at 100 amps, or
twice the charge acceptance of a new AGM battery, while recovery
times (the flat black line) remained stable at 30 seconds.

The BMW-Ford graph shows that AGM batteries fade very rapidly over
the first 5,000 miles of use in a stop-start equipped vehicle. The
BMW-Axion graph shows that the PbC offers optimal performance
through 40,000 miles. In a recent presentation at the 2011
Advanced Automotive Battery Conference in Mainz, Germany,
Axion unveiled an updated graph of follow-on testing through 80,000
cycles, or approximately eight years of use, with only modest
degradation.

I've been bullish about the future of stop-start idle elimination
technology for a couple years. If the JCI forecasts are even close
to accurate, I've been seriously understating the potential. Since
JCI is the largest lead-acid battery manufacturer in the world and
has a 36% share of the global automotive OEM and battery replacement
markets, it will undoubtedly be the biggest beneficiary of the rapid
worldwide implementation of stop-start idle elimination systems. The
second biggest beneficiary will probably be Exide Technologies (XIDE),
which is emerging from several years of tough restructuring and
trades at a significant discount to JCI on a forward looking
earnings basis. Emerging technology developers like Maxwell and
Axion also have significant opportunities to grab a sizeable share
of what's shaping up as $6 to $12 billion market niche. Their
respective market capitalizations are summarized below:

As former Axion director, I'm all too aware that it's a very little
fish in a very big pond. I also understand why the PbC's extreme
cycling performance and charge acceptance can be crucial to the
future development of stop-start, a world-class fuel efficiency
technology that's already being produced at scale and will become
dominant in this decade. It's easy to dismiss my ramblings
because I have a large stake in Axion. It's harder to dismiss BMW, a
first tier automaker that joined Axion as a co-presenter at last
year's ELBC. It will be darned near impossible to dismiss a big
three US automaker that's apparently signed on as an Axion
subcontractor in a pending DOE grant application.

Disclosure: Author is a
former director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock.

Charlie reminded me that when they began 5 years ago, they did so
along two major thrusts: The acquisition of Applied Films in June
2006
getting an inline coating system for deposition of silicon nitride
passivation layers on crystalline and in parallel an internal project
to adapt their large flat panel display manufacturing technology for
photovoltaics.

They still like the large module format, for a simple reason, cost
in the field for large scale solar farms is heavily about getting area
costs down relative to power output. I was excited for another
simple
reason, when major capital equipment developers get involved,
manufacturing maturity is not far behind, it forces everyone to rethink
scale in different ways.

After a huge initial splash outselling everyone’s expectations in
that SunFab concept, many industry analysts later kind of wrote them
off as flash in the pan when they were reported having problems as
implementations came in slower and smaller and harder than expected on
their SunFab lines a couple of years ago, and a saw a major
restructuring in 2009. But they’ve had success with that product
anyways, EVERYONE saw a major restructuring in 2009, and more
importantly the original vision of leading solar into mass
manufacturing is still going strong, now across a range of products and
technologies in thin film and crystalline manufacturing
equipment.
Let’s put it this way, in their annual report they call themselves the
largest equipment manufacturer to the solar sector, they have $1.5
Billion in annual revenues in the Energy & Environmental division,
which is heavily PV, and there are like 120 mentions of the word solar
in their annual report, almost once per page.

So what I really wanted to talk to Charlie about was the future of
PV manufacturing. He frames the future by drawing a mirrored parallel
between photovoltaics and integrated circuit manufacturing, beyond just
semiconductors:

In IC, dozens to hundreds of device architectures exist, but
basically one material, silicon.

In PV, there is essentially one architecture: the diode, but
dozens to hundreds of material choices.

But silicon has been the mainstay material of PV for a number of
reasons. So we got into one of my favorite topics, the
manufacturing
improvement potential in crystalline silicon.

His version of Moore’s law for solar runs like this: the
thickness
of the solar cell decreases by half every 10 years. Today it’s
180
microns thick. The practical possibility exists to get down to
about
40 microns, with some performance improvement by making it thinner, but
we can’t go much below 40 without being too thin to absorb enough
light. This fits with other conversations I’ve had suggesting
that
over the past couple of years most of the major crystalline solar
manufacturers were working on paths to take an order of magnitude out
of cell thickness.

If this comes to fruition, crystalline can literally wipe the floor
with the existing thin film technologies. Basically think sub $1
per
watt modules with the performance of high grade crystalline modules
today. And as cost per watt equalizes, that higher efficiency
starts
to really tell, as since Balance of Systems costs have fallen at 10-12%
per doubling of installed fleet, compared to module costs falling at
18-20%, in a world where BOS increasingly matters, the old saw about
lower area cost per unit of power installed starts to actually bite for
once. Think ultra thin high performance low cost large format
x-Si
modules with fancy anti reflective coatings and snazzy high grade
modules with on module inverters or DC optimizers mounted on highly
automated, low cost durable trackers. Think solar farms
approaching
effective relative capacity factors of 2.5-3 mm kW Hours per year per
MW on 25 year systems at $2-3 per Watt installed. Possibly the
only
thing on the planet that could match shale gas.

In fact, the entire thesis of thin film as a business and venture
capital prospect has been built on the premise that crystalline
material costs were just too high to get to grid parity. I’ve got scads
of early thin film business plans touting that. That thesis is
under
extreme pressure these days. I’d submit that if the industry 7 years
ago had really understood how much improvement could be had, we’d have
saved billions in potentially stranded thin film development.

Charlie says there are about a dozen different paths for enabling 40
micron cells. The most interesting approach to him is an
epitaxial
growth process on reusable silicon templates. A process which
grows a
thin layer of silicon on top of a reusable layer of silicon, using
perhaps one mm thick silicon templates, etching the surface, and
directly depositing silicon from trichlorosilane gas. The idea
would
be to rack templates into a module array, grow the cells in an oven to
your 40 micron level, then glue the glass module to the back side, and
then separate it off to form a “ready to go assemble” module. The
challenge is basically oven and materials handling designs that get it
cost efficient in high volume.

In essence, all you’d be doing is integrating a silicon ingot growth
process directly into a module. Instead of growing ingots, cutting
thick wafers, forming cells, then building modules from them, you grow
cells racked into their own module personally instead of growing ingots
first.

Hella cool. A process like that means using fairly manageable
capital equipment and materials handling technology development in
known device and module technologies we could literally rip the ever
living guts out of crystalline manufacturing costs. And there are
11
more paths to play with???

The way he thinks about it, on a broader perspective more people are
working in photovoltaic solar R&D today, by his estimate some
70,000 researchers and $3 billion per year, than in all of the prior PV
history. And that means whereas perhaps five main
innovations over 35
years drove almost all of crystalline PV manufacturing costs (screen
printing, glass tedlar modules, adapting steel from tires for cutting
wafers, silicon nitride processes, and fast metrology tools), in
today’s world, Charlie thinks we see 5 equivalent innovations in PV
manufacturing technology every 2 years.

So I asked him to comment on whether there were parallel cost-down
opportunities for thin films or whether it is an also ran waiting to
happen. He thinks there are. He mentioned organics. I
pushed back
hard, as organics have been written off by almost everyone for never
seeing yield or performance, so where does he see the
opportunity? He
responded that he picked organics to keep me from narrowing the
materials field prematurely to just A-Si, CdTe, CIGS, and GaAS.
Silicon just like carbon can surprise us, e.g. bucky balls, carbon
nanotubes, and just because early materials had stability and process
issues, doesn’t mean we’ve exhausted the opportunities.

He says what he wants us to recall is that we are currently
operating in PV manufacturing today with the materials that were on the
radar in the energy crisis from 1974-1980. That is changing in
the lab
and universities these days. And given time the results will
surprise
us.

He draws a parallel between photography and photovoltaics, both
invented in 1839, both rely on sunlight acting on materials. In
photography, people started off putting films on glass, then putting
films on mylar, and running things continuously. Implying that in
solar, we’re still on glass c. 1890.

He said to think about the original Ovonics/Unisolar vision in
thinking about how you get to high speed continuous processing with
thin film (think paper manufacturing, where done roll to roll it’s far
more consistent than one-offs can be done). If that is still our
ultimate thin film paradigm (got to love the chance to use the word
“paradigm”), the stars are still in front of us with what thin film
COULD do. And while roll to roll has had significant materials
technology and process control challenges for the current class of
materials, let’s go back to the mirror parallel to integrated circuits,
in photovoltaics, one main device, scads of material options.
Just a
matter of R&D hours and time.

He markedly did NOT suppose that the current state of thin film
devices could beat 40 micron crystalline silicon by themselves.
It’s
worth considering that we may look back and find that thin film, CdTe
and First
Solar
(FSLR) were the stepping stones to 40 micron crystalline, not
the other way around. Maybe my next question to Charlie is
whether he
and I should set up Neal and Charlie’s 40 Micron Solar Company of
America yet.

Neal dikeman is a founding partner of
Jane Capital Partners LLC, a cleantech
merchant bank whose clients have included the technology arms of
multinational energy companies. This article first appeared on CleanTechBlog
and is reprinted with permission.

June 25, 2011

Is Energy Sourcing the Gateway Drug to Energy Efficiency?

Tom Konrad CFA

I recently interviewed Richard Domaleski, CEO of World Energy Solutions (NASD:XWES).
World Energy
is a comprehensive energy management services firm whose core offering
is extremely price competitive energy sourcing (that is, finding an
energy provider to supply all of a client's energy needs at the lowest
possible cost.)
They achieve competitive sourcing using an electronic energy exchange
designed to achieve much better price discovery in what is
traditionally a very opaque market. According to Domaleski, a
recent KEMA study showed that only 7% of large commercial, industrial,
and government customers are sourcing their energy online; the rest are
using traditional brokered or paper-driven deals. World Energy
currently has about 5% of the market, leaving plenty of room for
growth. Among their current customers are the General Services
Administration (the Federal Government's procurement arm),
several state governments, General
Dynamics
Land
Systems, and Brown University, to name a few.

They also partner with Energy
Service
Companies
(ESCOs). ESCOs sign energy customers up to
a "Performance Contract" under which the ESCO is paid a fixed fee in
order to deliver a defined set of energy services (lighting and
temperature levels, for example), and the ESCO makes energy efficiency
improvements using their own capital to reduce energy use while still
delivering the defined energy services. The lower energy use
quickly repays the ESCO's out of pocket capital cost, leading to lower
(and stable) energy bills for the customer, and a healthy profit for
the ESCO.

Domaleski says that 143 such ESCOs and other procurement companies now
use World Energy's procurement
platform to source their energy. When I asked for names, he cited
non-disclosure agreements but was able to say that one prominent one
was SAIC (NYSE:SAI).
Yet
adoption
of World Energy's platform is not universal. One
prominent
ESCO
they pitched but did not convince is the leading pure-play
publicly traded ESCO: Ameresco
(NYSE:AMRC).

Is it Green?

Getting electricity and natural gas at lower prices may be a compelling
proposition for World Energy's customers, but environmentally concerned
investors should think twice before calling it green. A lower
price for energy is more likely to discourage than encourage energy
conservation, and hence lead to higher, not lower energy
emissions. Energy sourcing may or may not include the sourcing of
green power or Renewable Energy Credits (RECs.) A REC is a way of
accounting for all the green or environmental attributes of a MW of
electricity.

World Energy draws a distinction between "physical green power" and
RECs, with the former being produced from renewable sources on the same
ISO as the customer, and the RECs often produced somewhere else in the
world. I don't think this is a very useful distinction, since the
actual power produced is often not the same as the power consumed due
to both proximity and timing issues. A simple example of why this
is so can be seen in the case of a supermarket that signs up for 100%
locally produced wind power. While a nearby wind farm will indeed
be producing the same number of kWh as the supermarket consumes, the
supermarket keeps its lights on and continues to run its refrigeration
even when the wind is not blowing at the local farm. In this
sense, "physical green power" is just normal electricity with bundled
RECs.

What really makes a REC (or "physical green power") green is
additionality. If the price of the REC is enough to ensure that a
wind farm that would not otherwise have been built is indeed built,
then the REC is additional. World Energy's ability to extract the
lowest possible price for RECs may work to undermine the additionality
of those RECs. After all, which is more likely to increase the
chances of a wind or solar farm being built: a $10 REC, or a $20 REC?

Low Price as a Gateway Drug

Yet it's hard to see saving money as a bad thing, and I find World
Energy's numerous ESCO partners very encouraging. If World
Energy's procurement platform enables ESCOs to offer potential
customers performance contracts at lower prices, more such customers
will sign up, and receive the energy efficiency improvements that are
the ESCOs' bread and butter.

World Energy also offers energy efficiency improvements to their direct
customers as well as helping those customers capture the utility
incentives available for energy efficiency and Demand Response
programs. Demand Response companies
like Comverge
(NASD:COMV) and EnerNOC
(NASD:ENOC) may use World Energy's demand response exchange, but
also compete with them to sign up customers directly. As with
ESCOs, World Energy does not say which Demand Response providers use
their exchange, but they did say that they have 20 leading providers
signed up.

One of the most significant barriers to energy efficiency is simply
the complexity of options on offer. Although the internal rate of
return on efficiency investments is very high, the absolute number of
dollars available from energy efficiency is seldom enough to sell a
facilities manager. Facilities managers seldom have an incentive or
expertise to save energy, although this is improving as companies
become more energy aware and make changes to employee incentives to fit
the
new goals. Yet it is still generally difficult to get most
facilities managers to give energy the attention it needs in order to
capture the available energy
savings. Lower energy prices, on the other hand, are easy to
grasp and communicate to higher-ups. If World Energy and ESCOs
working with them can offer a
facilities manager a one-stop shop for both lower energy prices and
additional energy savings, they'll be much more willing to take
action, even with weak internal incentives. One step World Energy
has recently taken to make this
decision much easier is their strategic investment in
Retroficiency a company whose technology will allow World Energy to
conduct virtual energy audits for clients based on the detailed energy
usage data they are already collecting. This will allow
facilities managers to easily identify the particular buildings in
their portfolios most likely to benefit from more detailed energy
audits and retrofits.

Other Businesses

World Energy also runs other trading platforms, most notably the
platform for trading carbon credits under the Regional Greenhouse Gas
Initiative (RGGI). With New
Jersey
pulling
out
of
the
ten-state
RGGI climate initiative, I
thought it would be interesting to get Domaleski's perspective, but he
was unable to comment due to a confidentiality agreement with
RGGI. This exchange is part of their Green green product line,
which accounts for approximately 5% of World Energy's business and
includes other
environmental commodity trading as well as RGGI.

At the urging of a utility, World Energy has also recently launched a
wholesale energy exchange. This exchange enables utility and
municipal customers to find the best price for power from World
Energy's 500 suppliers. This must be a useful service, because in
the four years since the exchange was launched, they have signed up 70
large customers. The company's Wholesale division accounts for
roughly 15% of revenues.

Conclusion

The move to internet based energy sourcing seems like an inevitability,
and World Energy has a powerful first mover advantage. While
online procurement of energy may not be green in and of itself, the
savings on offer serve to get building managers in the door. If
World Energy or its ESCO partners can then include significant energy
efficiency and green power in the mix, we have the formula for a
significant shift towards a more energy efficient economy.

DISCLAIMER: Past performance
is
not a guarantee
or a reliable indicator of future results. This article contains
the current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment
advice or a recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not guaranteed.

June 24, 2011

The Alternative Energy Fallacy

John Petersen

In 2009, the world produced some 13.2 billion metric tons of
hydrocarbons, or about 4,200 pounds for every man, woman and child on
the planet. Burning those hydrocarbons poured roughly 31.3 billion
metric tons of CO2 into our atmosphere. The basic
premise of alternative energy is that widespread deployments of wind
turbines, solar panels and electric vehicles will slash hydrocarbon
consumption, reduce CO2 emissions and give us a
cleaner, greener and healthier planet. That
premise, however, is fatally flawed because our planet cannot produce
enough non-ferrous industrial metals to make a meaningful difference and the
prices of those metals are even more volatile than the prices of the
hydrocarbons that alternative energy hopes to supplant.

The ugly but undeniable reality is that aggregate global production of
non-ferrous industrial metals including aluminum, chromium, copper, zinc,
manganese, nickel, lead and a host of lesser metals is about 35 pounds
for every man, woman and child on the planet. All of those metals are
already being used to provide the basic necessities and minor luxuries
of modern life. There are no significant unused supplies of industrial
metals that can be used for large-scale energy substitution. Even if
there were, the following graph that compares the Dow Jones UBS
Industrial Metals Index (^DJUBSIN) with the Amex Oil Index (^XOI) shows
that industrial metal prices are more volatile and climbing faster
than hydrocarbon prices, which means that most alternative
energy schemes are like jumping out of the frying pan and into the fire.

For all their alleged virtues and perceived benefits, most alternative
energy technologies are prodigious consumers of industrial metals. The
suggestion that humanity can find enough slop in 35 pounds of per
capita industrial metals production to make a meaningful dent in 4,200
pounds of per capita hydrocarbon production is absurd beyond reckoning.
It just can't happen at a relevant scale.

I'm a relentless critic of vehicle electrification schemes like Tesla
Motors (TSLA)
because they're the most egregious offenders and doomed to fail when EV
hype goes careening off the industrial metals cliff at 120 mph. Let's
get real here. Tesla carries a market capitalization of $2.8 billion
and has a net worth of less than $400 million, so its stock price is
86% air – a bubble in search of a pin. Tesla plans to become a global leader in the development of
new electric drive technologies that will use immense amounts of
industrial metals to conserve irrelevant amounts of hydrocarbons. Even if
Tesla achieves its lofty technological goals it must fail as a
business. Investors who chase the EV dream without considering the
natural resource realities are doomed to suffer immense losses. Tesla
can't possibly succeed. Its fair market value is zero. The stock is a
perfect short.

I won't even get into the sophistry of wind turbines and solar panels.

Next on my list of investment catastrophes in the making are the
lithium-ion battery developers like A123 Systems (AONE),
Ener1 (HEV),
Valence Technologies (VLNC)
and Altair Nanotechnologies (ALTI)
that plan to use prodigious quantities of industrial metals as
fuel tank substitutes, or worse yet for grid-connected systems that
will smooth the power output from inherently variable wind and solar
power facilities that also use prodigious quantities of industrial
metals as hydrocarbon substitutes. Talk about compounding the
foolishness.

I can only identify one emerging battery technology that has a significant potential to reduce
hydrocarbon consumption and industrial metal consumption at the same
time while offering better performance. That technology is the PbC®
Battery from Axion Power International (AXPW.OB),
a third generation lead-acid-carbon battery that uses 30% less
industrial metals to deliver all of the performance and five to ten
times the cycle life. There may be other examples, but I'll have
to rely on my readers to identify them.

Humanity cannot reduce its consumption of hydrocarbons by increasing
its consumption of industrial metals. The only way to reduce
hydrocarbon consumption is to use less and waste less. There
are a world of sensible and economic fuel efficiency technologies that can help
us achieve the frequently conflicting long-term goals of reduced hydrocarbon
consumption and increased industrial metals sustainability. They include but are
not limited to:

Better buiding design and insulation;

Smarter power management systems;

Telecommuting;

Denser cities with shorter commutes;

Smart transportation management to reduce congestion;

Buses and carpooling;

Bicycles and ebikes;

Shifting freight to rail from trucks;

Smaller vehicles that use lightweight composites to replace
industrial metals;

Deploying solar and wind with battery backup for remote power
and in developing countries;

My colleague Tom Konrad wrote a 28 part series on "The
Best Peak Oil Investments." While I'm skeptical about the future of biofuels
after suffering major losses in the biodiesel business, Tom's work provides an exhaustive overview of
the energy efficiency space and a wide variety of investment ideas
that have the potential to make a real difference. Since we can't
simply take a couple of giant leaps into the future, we'll just have
to get out of our current mess the same way we got into it – one
step at a time.

We live in a cruel world. There is no fairy godmother that can
miraculously accommodate the substitution of scarce industrial metals
for hydrocarbons that are a hundred times more plentiful. We can and we must do better,
but we can't solve humanity's problems until we accept the harsh realities
of global resource constraints without the filters of political ideology and wishful thinking.

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and owns a substantial long position in its common stock.

June 23, 2011

Wind Fall

Debra Fiakas

Angela Merkel’s coalition government may not have looked at the nuclear
power question for anything more than a “cover your behind”
solution. Nonetheless, the wind industry sees last month’s
decision to phase out Germany’s nuclear power generation industry by
2022 as - no pun intended - a windfall.
Policy makers say as much as half of the deficit left by the shutdown
of nuclear power plants will need to be made up from other power
sources, principally wind power.

This is no small undertaking. A total of 21,607 wind turbines
with an overall capacity of 27,214 MW were in service in Germany at the
end of 2010. To replace half of the nuclear power capacity going
off-line by 2022, wind installations need to increase by as much as 40%
by 2022. German Wind Energy Institute (DEWI) reports that 1,551
MW of new wind power capacity was installed in 2010, well below goals
for 1,900 MW installations. The German wind power industry will
need to maintain if not accelerate its current pace of development in
order to meet Merkel’s nuclear replacement goal. This means many
new wind turbines sprouting up across the German countryside.

The most logical winner in this turn of events is Germany’s own Siemens AG
(SI). Siemens has dedicated considerable investment in
developing its line of seven wind turbines models. The company
boasts 7,800 turbines installed around the world, producing over 8,800
MW of power a year. For U.S. investors Siemen’s ADR has some
appeal as it is priced at a multiple of 11.4 times forward earnings and
offers a 2.8% dividend yield. However, the stock trades not on
its wind power business but on the relative strength of worldwide
earnings against currency fluctuations and other macroeconomic factors.

Germany’s Nordex
(NRDXF.PK) lays claim to first-mover status in the wind power
world. In 1995 with already a ten year track record in the wind
business, Nordex was the first to put a megawatt system on the
market. Since its inception Nordex has installed more than 4,400
Nordex wind turbines with a total rated output of more than 6,500
megawatts in 34 countries around the world. Of its large turnkey
projects only a small portion are located in Germany. Expect
Nordex to make some aggressive moves to get a larger part of the
domestic market.

Denmark’s Vestas
Wind Systems (VWDRY.PK) is not in the least intimidated by the
Siemens/Nordex home advantage. That is because Vestas has
installed over 43,000 turbines around the world with capacity to
produce over 44,000 MW of power. Over 5,800 of those turbines are
in German and Vestas is likely to use its track record in Germany to
get another big bite of the strudel so-to-speak. That fact that
Vestas does not report its financial results in the U.S. should not be
a deterrent for U.S. investors. The company provides financial
information in English on its corporate web site. Vestas ADRs
trade on the Pink Quote system in the U.S. with fairly good volume and
the bid/ask spread is reasonable. Otherwise it is necessary to
pick up shares on the Danish exchange.

For small-cap sector purists it will be necessary to consider at PNE Wind
(PNE3.DE) and REpower
Systems AG (RPW.DE). Both are Germany-based wind technology
companies that are likely beneficiaries of domestic wind power
policies.

With a knack for developing and installing wind power projects, PNE
Wind recently broke into the U.S. market with the sale of a wind farm
to Black Hills Power near Belle Fourche, South Dakota. (As a
native, I can vouch for the fact that there are a lot of Germans in
South Dakota.)

REpower Systems is another wind turbine producer with a full product
portfolio that ranges from wind turbines with an output from 1.8 MW up
to 6.15 MW and rotor diameters from 82 up to 126 meters. It
boasts the ability to install workable solutions even in areas with
weak wind experience.

In scrutinizing these company’s investors will need to take a
magnifying glass to cash flows and capital expenditures. Even a
whiff of inadequate resources for investment would be a tip to stay
away from long positions. Also a good look at product portfolios
would be helpful as sites for eventual wind power installations are
identified. Not all turbines are created equal and some may not
be the right configuration for Germany’s landscape.

Debra Fiakas is the Managing Director
of Crystal
Equity Research, an alternative research resource on small
capitalization companies in selected industries.

Neither the author of the Small Cap
Strategist web log, Crystal Equity Research nor its affiliates have a
beneficial interest in the companies mentioned herein. All stocks
mentioned in this article are included in Crystal Equity Research’s Earth,
Wind and Fire Index in the Wind Group.

4. The
bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

4. Bottlenecks: There are two major
things holding back the GHP industry.

1. Technical knowledge. IGSHPA,
The
International
Ground
Source
Heat Pump Association, has created a
training certification to help spread the knowledge. HeatSpring Learning Institute,
along with a number of other private and public education providers, is
using the IGSHPA certification to build the base of industry
professionals who can install geothermal.
2. Financing. Similar to the solar industry, the large amount of money
upfront needed to install geothermal has impeded growth. Until the
industry can figure out the financing, like the solar industry has with
the PPA, growth will not be rapid. LVestus is a
New Hampshire based company that is now offering a TPA, a thermal
purchase agreement, and is addressing the financing issue.

If these two items are addressed, the growth of the GHP industry will
be much faster than the 30% it has been for the last couple years.

5. How can you invest in this growth?
Where is the opportunity in the GHP Industry?

In the solar industry, although it’s very volatile, it’s very easy to
find a place to invest. There are a number of large, publicly traded
manufactures that are pure plays FSLR,
TSL,
STP,
just
to
name
a
few. There’s also a wide range of ETFs, or
Exchange-Traded Funds.

The GHP industry is showing strong growth, it’s a sizable market, it’s
based on solid technology, and demand will only increase over the next
30 years as our nation invests in upgrading our building infrastructure

With that said, let’s take a look at the products and services provided
in every geothermal installation to see where the opportunities exist
for investment.

Products and Services

Heat Pumps - HVAC condensing/evaporate units

Ducting Installation - Sheet metal and duct seal to deliver
hot/cool air to the conditioned space from the heat pump

Grout - Cement or bentonite based compounds used in the
installation of the ground loop

Pump Package - Standard pumps reconfigured for geothermal use to
move water from the ground loop to the heat pump

Ground Loop - Simple high-density polyethylene (HPDE) plastic
installed in th ground to extract or deposit BTUs from or to the heat
pump

Other than the
heat pumps, the rest of the products are nearly impossible to invest in
because they are:
1. Very small companies that are not large enough to become public.
This pertains to most design and installation firms as well as software
companies. Loop
Link Geothermal design software is a great example of this--they
have great software used by many in the industry to design residential
and light commercial systems, but it’s a niche play so the company
remains small.
2. Commodity products. It is difficult to distinguish a commodity
product’s use in geothermal applications versus other applications. For
example, ducting and pump packages are used for hundreds of other HVAC
applications, and it’s impossible to find a company that just sells
“geothermal” ducting or pump packages--they do not exist.

6. The only opportunity to invest in
GHP is in the heat pumps themselves.

After a review of GHP manufacturers, there are only three that are
public and accessible. UTX and LXU are both large corporations where
GHP probably represents less than 10% of yearly revenue. While UTX’s
main business units are comprised of defense and aerospace, a minority
interest is in the building industry through Carrier, where it has a
stake in GHP manufacturing. LXU is less diversified than UTX and has
two main business units--climate control and chemicals. The climate
control group designs and manufactures a range of HVAC products
including ground source heat pumps. WFI is the only pure play on the
GHP industry.

In the end, I’d suggest that LXU and WFI are the only access routes to
the GHP industry in public equities. Both ClimateMaster (LXU) and
WaterFurance (WFI) are respected manufacturers within the industry and
provide quality products.

After completing the analysis and looking at direct access to the GHP
industry, I was surprised how decentralized the industry is for every
product within the supply chain. Based on the number of products that
go into every GHP installation, I would have thought it would be easier
to invest in the industry. However, if you use Porter’s
five
forces
analysis it becomes clear why the GHP industry is
structure is so different from solar. The GHP industry as a whole
is highly competitive, very price sensitive, and built around
commodities instead of proprietary technology or manufacturing
techniques like we see in the solar industry.

If you’re really interested in taking advantage of the GHP industry,
WFI and LXU seem to be your best options. While UTX is also possible,
it’s much more of a defense/aerospace play than a GHP investment.

“The total market for U.S. GHPs in 2009 is estimated to be about $3.7
billion dollars, including equipment and installation cost (and not
reduced by government or other incentives). The dealer who sells the
equipment typically installs it. PMG expects a growth rate of 32% to
continue for a few years. By 2013, PMG projects the U.S. geothermal
heat pump market to be in excess of $10 billion.”

The solar market and the geothermal heat pump market in 2009 were
essentially the same size; however, while the solar PV industry is
growing much quicker, both have strong positive outlooks.

Will the growth of the geothermal industry continue for the next 10,
15, 20 years, and can we invest in public equities like we can in the
solar pv industry to benefit from this growth?

In this article, I will walk through an analysis of
1. What is driving the growth if the GHP industry
2. Why property owners and utilities are adopting GHPs
3. The market segments that are adopting geothermal the fastest
4. The bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

For today’s article, we’ll focus on section 1 through 3.

1. What’s driving the GHP industry?

As good investors, let’s walk through a little industry analysis to get
a sense for the geothermal heat pump space.

Geothermal is a reliable energy source and a solid investment that is
more broadly applicable than solar because the technology is not
susceptible to state policy, like solar pv. Put another way, the
financial return that a GHP system provides to property owners is based
more on the fundamental technology and the fuel it is displacing rather
than government incentives. I’d suggest this means it is less volatile
from an investment perspective than the solar pv industry.

Geothermal heat pump HVAC systems are attractive because the technology
is fundamentally sound and super efficient. A typical system is between
300% to 500% efficient--meaning for every unit of energy you put in,
you harvest 3 to 5 more units. To understand more, download the Geothermal
Survival
Kit, written by Kevin
Rafferty who co-authored the ASHRAE publication, “Ground-Source
Heat Pumps” - Design of Geothermal Systems for Commercial and
Institutional Buildings. The Department of Energy also has some great
geothermal heat pump resources. ASHRAE is an “international
technical society organized to advance the arts and sciences of
heating, ventilation, air-conditioning and refrigeration.” (www.ashrae.org)

2. Here’s what you need to know about
customer adoption of GHP as an investor:

Geothermal heat pumps offer a number of advantages over traditional
heating and cooling methods to property owners, namely they offer the
following:

Highly Reliable

Combustion Free

Virtually Zero Emissions

No On-Site Contribution to Global Warming

Local Availability (no fuel or transportation expense)

Electric utilities generally favor GHPs because they provide a
stable base demand all year

Geothermal HVAC also very useful in gaining LEED certification
all types of properties. Green building demand has been skyrocketing in
recent years and GHPs can provide a significant number of points in the
rating system. Learn more about Geo and LEED in this whitepaper: Let
Geo
LEED
The
Way

3. GHP Are Becoming the Norm in Some
Applications

All day long at HeatSpring,
we’re talking to contractors, HVAC professionals and drillers who are
taking our IGSPHA geothermal
training
program
because
more
and more of their customers are asking about
geothermal. Many of our alumni have weathered the recession by
investing in training and moving their business into this new segment.
The residential market is the strongest in new construction, where the
systems can be financed from day one. However, the retrofit market is
still strong, especially if the building has an old furnace or leaky
building envelope. Also, with large commercial or government projects,
geothermal is becoming the norm because upfront costs are less of a
consideration (like with residential customers) and lifetime savings
and NPV are more important.

June 20, 2011

Investors Sweet on Second-Gen Biofuel IPOs But Caveats Remain

by Ivan Castano

Second-generation
biofuel IPOs are all the rage this year with recent deals pricing well
above initial expectations and a growing number of companies expected
to tap the capital markets in coming months. But analysts caution some
of these companies will have a hard time wooing investor interest
unless they become more transparent about their accounts and future
path to profitability.

"None
of these companies will be earning much any time soon so investors want
to see clarity and visibility about the enterprise story behind the
companies," says Stacey Hudson, an analyst with Raymond James.
"If they have a strong story and the right technology, there is
definitely appetite out there. Investors have become more comfortable
and knowledgeable for second-generation biofuel companies."

Certainly, investors have been keen to bankroll the latest IPO’s,
sending their post-IPO valuations sharply higher. Late last month,
algae-for-biofuels firm Solazyme (SZYM)
priced its IPO at $18, the top of the
initial price range and saw its shares jump 15% on its trading debut,
raising $227m.

Eager to profit from this momentum, investment banks are scrambling
to price deals before market sentiment changes with one senior IPO
banker saying his firm is working on at least 18 potential deals. So
far, however, the only well-publicized IPO hopefuls include Petroalgae (PALG.OB),
Ceres,
Myriant
and
Kior. Hudson expects Kior will do well because it
has a "strong technology" and uptake partnerships. However, she says
Petroalgae, which has been hoping to IPO since last year, may struggle
because of "some week elements in its business model."

Caroline Taylor, an analyst at the Energy
Biosciences
Institute
in
Berkeley,
says Ceres has a good strategy because it is a feedstocks
company. She said that establishing the feedstocks for advanced
cellulosic fuels is crucial for commercial development, given that the
largest cost associated with production is for the feedstock.

Standing Out in the Crowd

In the biofuels game, having an economically feasible business model
is crucial at a time when many firms are struggling to make money amid
soaring feedstock costs and falling oil prices. Kior's core business is
transforming non-food biomass into so-called renewable crude oil that
can then be refined to make a variety of gasoline and diesel blends. It
says it can sell its crude oil at a much lower price than biofuel,
which typically sells at $3-4 a gallon.

Meanwhile, Ceres, which hopes to raise as much as $100 million to
expand its output of genetically modified crops to make biofuels, says
it is developing sweet sorghum as an alternative to sugarcane to make
biofuels. It is also working to improve corn and soybean yields as well
as making other crops that can better tolerate drought and salt. Ceres
also has some high-powered partnerships in place, including Monsanto,
which is helping it research and develop some of its products.

Myriant, which is also eyeing some $100m in its flotation, makes
"biocatalyst" technology for the conversion of renewable feedstocks
into special chemicals including succinic acid. Petroalgae, meanwhile,
sells a technology it claims helps improve the growth and harvest rate
of plant micro crops or algae to generate proteins that can be used to
make biofuels, animal feed and human food. While it hoped to IPO last
year, the company has struggled to find the right window to come to
market. Some say it's failure to attract investment from ExxonMobil,
which sunk $600m into algae-to-biofuels rival Synthetic Genomics in
July 2009, raised questions about the value of its technology.

Showing just how crucial technological differentiators have become
in the industry, observers said Solazyme's success was primarily due to
it's ability to grow algae in fermentation tanks without sun or
photosynthesis processes, which are used by most rivals. In a recent
report analyzing the upcoming IPOs, Raymond James states technology
will be a make-or-break factor for the success of future second-gen
biofuel IPOs. But so will other factors including a clear proof of
concept, roadmap to profitability, strong strategic partners and
adequate and inexpensive access to feedstock.

Ivan Castano is a freelance
journalist based in Miami. His work has appeared in Thomson Reuters’
International Finance Review (IFR), Dow Jones’ Financial News,
Euromoney, Trade & Forfaiting Review and a range of trade
publications covering the capital markets, private equity, loan, credit
and restructuring markets.

This article was first published
on Renewable Energy World, and is reprinted with permission.

June 19, 2011

Wall Street's Irrational, Dangerous Hatred of Solar Stocks

Garvin Jabusch

For
most of 2011, the stocks of solar power companies of all kinds, from
providers of raw polysilicon to developers of finished utility scale
plants, have been taking a beating on world and U.S. stock markets,
partly because solar has been the industry most singled out for attack
by bearish short sellers. I can’t describe this phenomenon any better
than did Roberto
Pedone in a recent column
for thestreet.com:

Besides the banking sector post-2008 financial crisis, I can't
think
of a group that's as hated and despised as solar stocks…For whatever
reason, this entire complex has become a favorite target of
short-sellers. There are so many names in the solar sector that are
heavily shorted that it's hard to find a name the bears aren't leaning
all over. One famous and successful short-seller, Jim Chanos, has even
made it publicly clear that he thinks the wind and
solar stocks are a
bunch of "hot air."

"For whatever reason" indeed. Solar is hated in spite of being the
fastest growing energy sector in the U.S. (67%
2010 growth; 66%
growth just in the first quarter of 2011) and in the world (70%
2010 growth), and also despite its shares trading at very low
valuations already. Take for example Green Alpha ® Advisors'
holding
and China-based solar company LDK
Solar (LDK).
The
company's
shares have fallen from US$14.49 per share in February to
$6.94 as of this writing. I can find no good fundamental reason for the
decline: LDK's latest quarterly earnings came in at $.95 per share
where consensus analyst expectations were $.86; the company has
year-on-year sales growth of 202%, has a price-to-earnings ratio of
only 2.22, plenty of cash on the balance sheet, and a price-to-book
ratio of just .91. That's right, even if the company were closed and
its assets liquidated, the cash generated at the yard sale would be
greater than the current market cap, though the earnings should have
value. LDK is the very definition of a "value" stock. Or, inversely,
shorting any company this cheap, that's this fundamentally solid, and
that's growing this fast is the very definition of "irrational." LDK
happens to be one of our favorites, but it's easy to find similar
valuation stories throughout the industry today. This trend would be
odd enough on its own, but, simultaneously, other events in the story
of global energy are unfolding.

While solar companies are being beaten up, the fossil fuels side of
the energy supply is having a more fundamental, structural problem: oil
demand has run ahead of our apparent capacity for production. Image 1,
below, shows that total world oil reserves have declined significantly
over the last two years (an exception being the U.S. strategic reserve,
but that too may soon
be
tapped), which can only mean that the world is using oil faster
than it's being pumped.

It's difficult to overstate how economically dangerous this is,
since, see image 2 below, oil price spikes have preceded all recessions
since 1970. Environment aside, this is why we need to bring more
renewables online, to lessen our ridiculous economic vulnerability to
oil prices. Referring to his chart (image 1) below, economist Gregor Macdonaldwrites:
"[f]rom
the latest IEA Paris
Oil Market Report,
you can see that starting in mid-year, total OECD inventories started a
new decline. Moreover, the histograms in the below chart also show the
difference to the five year average, which also illustrates the global
stocks drawdown. This coincided by the way with a resurgent, mid-year
advance in the price of oil from a low of $69 to $92 by [2010] year
end."

Macdonald concludes, "Unable to meaningfully increase global oil
production to meet demand, the world ate through inventories. You
have been warned."

Again, the drawdown in inventories and evidence
of
peak oil is alarming because spikes in oil prices crush
economies. We've written about this many times,
but
this chart (image 2), compiled
by Stuart
Staniford, says it all: "since 1970, every single recession has
been preceded by a runup in energy prices."

Oil is expensive to the point that it is threatening the economic
recovery, and due to demand exceeding supply, its price will most
likely continue to increase, except, maybe,
during
oil-caused recessions.

Meanwhile, on the electricity side, solar is quietly becoming
competitive
with average grid price (especially in sunnier climates) and is rapidly
getting cheaper still. "Price per watt of solar modules (not counting
installation) [have] drop[ed] from $22 dollars in 1980 down to under $3
today," according to Ramez Naam, in a
great piece for Scientific American.
And,
as this trend continues, "in 2030, solar electricity is likely to
cost half what
coal electricity does today." I personally believe that solar's scale
is increasing rapidly enough that Naam’s 2030 prediction will occur
much sooner, by 2020 or so (the Institute of Electrical and Electronics Engineers
says "within
10
years"),
but whenever it happens, as solar comes into its full potential, it
will become so cheap and plentiful that any type of fossil fuel will
seem foolishly expensive by comparison, at least where electricity is
the energy of choice.

But behind these macroeconomic realities, Wall Street's consensus
opinion of solar stocks looms large. And, so far this year, the
consensus has been extremely
negative. Does Wall Street to some degree answer to the huge buckets of
money represented by Big Oil? Yes. Is there therefore some effort
underway to delay the inevitable solar powered future? Possibly, but
suffice it to say that Wall Street at least has enabled a culture that,
against all economic and climactic evidence, loves fossil fuels and
still views renewables as “alternative.” (Anecdotal but interesting
on
this point,
on May 4, 2011 CNBC reported on-air that Arizona's First
Solar, Inc. (FSLR, a
Green Alpha holding) missed their first quarter earnings, when in fact
the company's earnings had beat
expectations
by 15%; the stock plunged 10%.)

Meanwhile, other folks are beginning to embrace the Next
Economy.
Smart oil money in Saudi Arabia is converting itself to massive amounts
of exportable solar. "Converting" as in Saudi Arabia is hoping to
develop the same quantity of solar electricity exports that it now
enjoys via oil exports. As I discussed in my previous post,
"Saudi
Arabia exports about
2.7
billion barrels of oil per year, each containing the equivalent of
1,700
Kilowatt hours (kWh) of electricity for a total of 4.59 × 1012kWh
[or
49,500 GWh] per year, or the equal of about one quarter or the
world's annual electricity demand."
Using
a standard
PV average of 30 square kilometers per gigawatt hour (GWh) year, this
means the Saudis would need 1.377 million km2 of solar
panels to achieve their goal solely with PV. This is well over half the
country’s total size of 2.218 km2!
Now of course this is an extreme goal that the Saudis are unlikely to
reach, and their efforts will no doubt also include concentrated solar
thermal, but even a small fraction of this goal would provide every
solar manufacturer on earth with years of order backlog. It’s worth
noting that the Saudis are likely pursuing this policy to replace lost
revenues as they deplete their oil reserves (and they’re using foreign
petro dollars to do it).

Elsewhere in the world, China has recently doubled
down on its goal of 5 GW of installed solar capacity by 2015 to a
new 10 GW goal. In Germany, they’re halting
their solar subsidies repeal in order to meet their plan of replacing
nuclear power with renewables (the end of German/European solar
subsidies has been one of the short sellers’ chief arguments. Italy has
just voted
to
scrap new nuclear plans as well, so they may also feel the need
to keep their solar incentives; more broadly, the twilight
of nuclear in general may have arrived). In Japan, a “proposed feed-in
tariff would create guaranteed demand for all of the output from
renewable energy projects” and companies are planning
projects accordingly. Adding up the world’s PV solar plans in his “Plan B” review,
Lester Brown reckons
that “cumulative PV installations could reach 1.5 million megawatts
(1,500 gigawatts) in 2020,” and goes on to say that “[a]lthough this
estimate may seem overly ambitious, it could in fact be conservative,
because if most of the 1.5 billion people who lack electricity today
get it by 2020, it will likely be because they have installed home
solar systems.” (Brown’s estimate could indeed be conservative; he was
writing before the Saudis’ announcement).

Viewed simply in terms of potential growth as a slice of the world
energy market, solar again appears set for massive growth. The Economistreported
this week that as of 2010 "non-hydro renewables still check in at only
1.3% of global energy consumption." Since many local, regional and even
a few
national governments have set mid-term goals of 20% or more from
renewables, it seems likely that solutions such as solar and wind have
potential to grow 10 fold or more on policy basis alone.

You get the point by now. Aggregate solar power demand in the global
economy is huge and growing. Any way you slice it, the solar
industry
is currently very undervalued by analysts and traders, even though
overdependence on oil is threatening to return us to recession.

So, how do we judge Wall Street's treatment of solar
stocks?
Irrational? Obviously. Dangerous? Only if you fear for the
economy.

June 17, 2011

Maxwell Stakes its Claim in a $2.7 Billion Niche Market

John Petersen

Last Wednesday Maxwell Technologies (MXWL)
announced
the launch of a new ultracapacitor product that insures reliable
engine starting for commercial trucks and other heavy vehicles.
According to the Energy
Information Administration, the existing US fleet includes 4.2
million heavy-duty diesel trucks. All of these vehicles are subject to
strict anti-idling laws and regulations that strain their battery
systems and increase the risk that the engine won't be able to start
when it needs to. While a dead battery is a pain for the average
consumer, it can cause a world of problems for a commercial truck that
has to stay on schedule and can't afford the lost time or the
out-of-pocket costs associated with a roadside service call.

The Maxwell solution is simple, but effective. They've packed twelve of
their 3,000 Farad BoostCap ultracapacitors into a standard Group 31
battery case along with the necessary control electronics. Since heavy trucks
frequently use four or more lead-acid batteries to power starting, lighting
and accessories, the ultracapacitor pack is swapped for one of conventional
batteries, wired directly to the starter and then connected to the rest of the electrical
system. The installation is simple and can be done in less than an hour. Once the ultracapacitor
pack is installed, it will assure trouble-free starting for the life of
the truck even if the batteries get severely depleted. With an expected
retail price of $1,299, the product should pay for itself in a couple
of years by reducing the frequency of battery replacements, avoiding
service calls that can cost up to $600 each and reducing downtime costs
including late deliveries and spoilage of perishable products.

While Maxwell has not released specifics on its expected revenue per
ultracapacitor pack, I'd have to guess that something on the order
of half the retail price should flow back to Maxwell. With a national
fleet of 4.2 million trucks and a revenue potential of $650 per
vehicle, the addressable market works out to $2.7 billion. It's a niche
market, but a very attractive opportunity in a transportation sector
that truly needs a better energy storage solution for starter systems.

Maxwell was kind enough to share their preliminary marketing
presentation with me and it clearly lays out the advantages. The
ultracapacitor pack draws its energy from the other lead-acid batteries
with a trickle charge that takes about 15 minutes and draws about 36
watt-hours of energy from batteries that have a combined capacity of
roughly 3,000 watt-hours. When it's fully charged the ultracapacitor
pack can deliver up to 1,900 amps of starting current and support up to
three cold cranking events per charge. Since the system is ultracapacitor based,
temperatures as low as -40° F will not impact performance.

While the product is an important milestone for Maxwell, it's also a
great object lesson in how economies of scale work. The ultracapacitors
Maxwell will use in the system are part of its K2
series. These are the same basic devices that Maxwell uses for its
hybrid bus and wind turbine products. Each of the 12 ultracapacitors is
roughly the size of a soda can, which makes integration into a compact
starter pack relatively straightforward. The biggest reason Maxwell could afford
to develop this product for the trucking industry is that it's already
making millions of the basic ultracapacitor every year and the new
starter solution is simply another use for a proven product that's
already being manufactured at scale. As a result Maxwell was able to
develop the product in-house and plans to take it directly to end-user
and OEM markets without bringing in another manufacturer as a partner.
It should enjoy a significant first mover advantage, retain a higher
degree of control over its own destiny and enjoy higher long-term
margins than it would if the product had been developed in cooperation
with somebody else.

Last fall Maxwell's stock price ran from $12 to $17 in response to an automotive
design win that will involve the installation of $50 BoostCap
modules in up to a million new passenger cars over the next three
years. When I compare the relative value of the two products and the
fundamental end-user benefits of the two solutions, I have to believe
the starter solution for heavy trucks will be an order of magnitude
more important to Maxwell's top and bottom lines over the next few
years.

This is a very important product announcement that the market seems to
have missed.

June 16, 2011

Ten Clean Energy Stocks I'd Buy Now

Two years ago I had a problem. In the universe of clean energy
stocks I watch, I could not find any that I thought were good
values. So I wrote an article saying "We're
near the peak."

If you had been comparing that call to the performance of the broad
stock market since then, you would have to conclude that I was
ludicrously wrong. The S&P 500 is up 40% since then.

If on the other hand, you'd been watching clean energy stocks, you
would have found that the overall trend has been flat to down.
The PowerShares
Clean Energy (PBW) ETF has basically been flat since then, while
solar (TAN)
and wind (FAN)
ETFs are each down about 20%.

I mention all this because I notice something new, that hasn't happened
for almost two years: I'm again finding clean energy stocks that I
think are bargains. I think the sector and the market as a whole
still have a lot of room to fall, but I'm encouraged to finally have
companies to write about that I think are worth buying again.

Ram Power and Nevada Geothermal also had real problems at their
geothermal projects, but I feel that the market has vastly overreacted
to both, making the pair bargains by almost any measure, and also potential
takeover targets in my estimation. If I were picking my ten
stocks today, it would be the list above, with the three Geothermal
companies underweighted relative to the rest to avoid putting too much
money into one tiny sector.

All in all, it feels good not to be sitting on the sidelines
anymore. Blood is on the streets for a lot of decent renewable
energy and energy efficiency stocks, and experienced market hands know
that it is often the best time to buy.

But keep some cash on the sidelines. Right now, I expect the
market will get worse before it gets better. If I'm right, and
you'll want to have cash available to take advantage of other
opportunities that arise down the road.

DISCLOSURE: Long NFI-UN, CVT, COMV, ENOC, RPG, MGMXF, AXPW, NGLPF,
ABTG, RKWBF.DISCLAIMER: Past performance is
not a guarantee
or a reliable indicator of future results. This article contains
the current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment
advice or a recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not guaranteed.

June 14, 2011

An Elephant Hunter Explains Inflection Point Investing

John Petersen

In "An
Elephant Hunter Explains Market Dynamics" I discussed the two
basic types of public companies; earnings-driven companies that are
“bought” in top-tier weighing machine
markets and event-driven companies that are “sold” in lower-tier voting machine
markets. Today I'll
get a bit more granular and show how "sold" companies usually fall into
one of two discrete sub-classes that have a major impact on their stock
market valuations.

As a starting point, I'll ignore the China-based companies that are listed in the
US because their quirky metrics would only confuse the analysis. Then
I'll break my tracking list of 14 public companies down into
three sub-classes as follows:

Established manufacturers that have earned a competitive position
in their target markets and are or have been stable and consistently
profitable;

Transition stage manufacturers that have progressed beyond the
R&D stage and are increasing revenues, but have not
turned the corner to consistent profitability; and

Technology developers that are still in the R&D stage and
have not completed a credible product launch or started to develop a
predictable revenue stream.

In the following graph from Osawa
and Miyazaki that summarizes the business dynamics underlying valley of death analysis,
the established manufacturers are all beyond the crossover point
between the valley of death and success as a business; the transition
stage manufacturers are all between the product launch and success as a
business; and the technology developers are all between research and
product launch.

The following table presents summary valuation data on each of the
companies included in the three sub-classes. Dollar amounts are expressed in millions.

Established Manufacturers

When you consider the five first-tier companies including Johnson
Controls (JCI),
Exide (XIDE),
Enersys (ENS),
C&D Technologies (CHHP.PK)
and Ultralife (ULBI),
you'll note that all of them have long histories and established
competitive positions in their target markets. While C&D and
Ultralife are currently losing money, they have been profitable in the
past.

In general, the members of the established manufacturers class trade on
the basis of earnings, have an average price to book value ratio of 1.6
and have an average price to sales ratio of 0.5. While companies in the
established manufacturers class usually trade within a reasonable range
of their peers, you can occasionally identify special events in the
past that are not likely to be repeated in the future. Examples include
$48 million in nonrecurring charges reported by C&D for the year
ended January 1, 2011 and $53 million in nonrecurring charges reported
by Exide for the year ended March 31, 2011. Since both
companies are emerging from their own versions of a rough patch, they
merit special attention and have a good shot at substantially
outperforming their peers in the established manufacturer class.

Transition Manufacturers

When you get into the transition stage manufacturers including Maxwell
Technologies (MXWL),
A123 Systems (AONE),
Ener1 (HEV),
Active Power (ACPW)
and Valence Technologies (VLNC)
the valuation multiples jump abruptly and the price to
book and price to sales ratios are also far more variable than they are in
established manufacturers class. For transition stage manufacturers, I've found
that a far more useful metric is
a measure I refer to as blue-sky; the difference between a company's
reported book value and its total market capitalization.

Using the blue-sky metric, you'll see that the blue-sky premiums for
all five companies are clustered around an average of $190 million.
Once you know what thee blue-sky premium is for a peer group of companies
you can use it to help select outliers that are
significantly over-valued or under-valued compared to their peers. In the peer
group of transition stage storage manufacturers, Maxwell is trading
at a relatively rich valuation compared to its peers, but the premium
seems to be justified by growth. In comparison, Valence is deeply under
water from a book value perspective but maintains a high market price
in spite of the ugly fiscal realities. The differences lead me to
believe that Maxwell is a hold while Valence is a sell or even a short.
At the low end of the spectrum, Ener1 is trading at a deep discount
until you consider possible
future impairment charges that would bring it into line with its
peers by reducing reported book value and increasing blue-sky.

Technology Developers

The third class, technology development companies, includes Altair Nanotechnologies (ALTI),
Axion Power International (AXPW.OB),
Beacon Power (BCON)
and ZBB Energy (ZBB).
These companies have not reached the point
of a credible product launch, although all of them are approaching a
point in their development where a significant revenue ramp over the next couple years seems
likely. Like the transition manufacturers, the price to book and price
to sales ratios are far too variable to provide useful guidance,
however the blue-sky premium which averages $20 million for the class
can be a very useful tool and help in identifying outliers like Beacon
which currently trades at a significant discount to the peer group.

Inflection Point Investing

At some point in their development, all companies either move up
the food chain or drift down. I've found that the inflection point
between being a transition manufacturer that's valued on the basis of
expectations and being an established manufacturer that's valued on the
basis of earnings can be a difficult and painful time for investors as
management strives to meet the quarterly expectations in order to
maintain or grow their stock price. While I don't foresee short-term
inflection point for any of the transition stage manufacturers I track,
Maxwell and Active Power are the closest and over the next couple years
they will experience increasing pressure to meet profit expectations in
addition to revenue expectations.

As an elephant hunter, the inflection point I've always liked best comes during
the months immediately before and after a credible product launch. During this
period the only things that matter are revenue and the market's
expectations for future ramp rates. It's generally the time when blue-sky
premiums climb from an average of $20 million to something closer to
$200 million. It's usually hard to pinpoint a specific revenue level that marks
the inflection point, but it's also safe to assume that the magic will
happen somewhere between $10 million and $40 million in annual
revenue. In my experience there's no other time in the life cycle of a
company that offers higher medium-term appreciation potential.

Of the four technology developers I track, the two with the clearest visible paths
to a substantial revenue ramp are Beacon and Axion. Beacon
recently commissioned its Stephenstown frequency regulation
facility and is planning to build a second facility in Pennsylvania
later this year. The two facilities should generate annual revenues of
$12 to $24 million, depending in large part on the final disposition of
a pending pay-for-performance tariff proposal. While $12 million in
revenue would likely keep Beacon in the technology development class
for a while, approval of the pay-for-performance tariff would probably
be enough to move it up into the transition class. Once Axion completes
the validation and certification of its automated second generation
electrode fabrication line and begins shipping products for
demonstration testing by several first tier manufacturing customers, it
should be well on the way.

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock.

New Flyer is the largest of the five suppliers of heavy duty transit buses in North
America. Unlike its competitors, New Flyer is focused solely on
transit bus sales, parts, and service. The company has industry
leading technology, offering a full range of bus styles and propulsion
systems, including diesel, liquid or compressed natural gas, gas
and diesel hybrids,
electric trolley buses, and hydrogen. They are currently
developing a pure electric version.

Transit buses are a cyclical industry which is currently in a downturn.
Municipal transit agencies are the main customers, and bus
manufactures' sales move in line with transit agencies' budgets.
Many transit agencies currently face budget cuts even as high gas
prices stimulate
demand. That's because fare box collections typically only cover
about a third of the costs of running a transit agency, the rest must
come from local, state, and federal transfers.

Both New Flyer and their competitors have shed workers to better match
their production capacity with lower demand, but the remaining capacity
is still enough to keep the bidding for contracts very
competitive.

The Payout

The New Flyer income deposit security (“IDS”) consists of one common
share and a C$5.53 principal 14% subordinated note. The monthly
distribution currently consists of a C$0.03298 cash dividend and a
C$0.06453 interest payment on the note, for a total monthly
distribution of C$0.0975. At the closing share price $7.79 on
June 10th, that's a 15% yield.

Unfortunately, the increasingly competitive environment means the
company will probably need to cut payments to IDS holders in the coming
months. New Flyer has made significant progress cutting costs and
improving
operational efficiency, yet an increasing
tax rate and lower selling prices have reduced distributable
income. Distributable income has been roughly equal to IDS
distributions over the last two quarters, while the long term average
distribution was only 80% of distributable income. Since the
company's tax rate is set OT increase over the next year, and the
competitive environment is unlikely to improve much before then,
payouts will almost certainly need to be reduced.

Strategic Options

New Flyer's board is in the process of evaluating a number of strategic
options, both to better cope with the cyclical nature of the industry
and the unsustainable distributions. On the recent May
13
conference
call
(MP3) they stated that they expect to announce
their new strategic plan "in the next couple of months." I take
that to mean by the end July. Including cutting the dividend,
they are looking at acquisitions in adjacent industries with the intent
of making their overall business less cyclical. I take this to
mean other types of buses, perhaps light duty transit or intercity
motor coaches, or the acquisition of a parts and maintenance
company. Investor worries surrounding the upcoming decision seem
to have driven the recent price drop from the C$11.50-12.00 range to
the current price below C$8.

Any acquisition would put more pressure on company resources, so I
consider it a certainty that the dividend will be cut. The
interest payment, however, cannot be eliminated unless the notes are
called. The first opportunity to call the notes will be in 2012,
for 105, meaning that note holders would need to be paid C$5.8065
(which
would have to be raised through other borrowing or the sale of stock),
and IDS holders would still retain their equity interest in the form of
a common share.

I can't predict if the company will call the notes, but the Q1 2011
book
value per share was US$2.36 or C$2.32, so the combined book and
principal value of an IDS is C$7.85, above the current stock
price. For a company that will almost certainly continue to pay
the interest on the subordinated note until the notes are called,
this seems like a bargain. The interest payment alone amounts to
a 10% yield at C$7.79. New Flyer should be able to remain current
with these interest payments even if income falls another 30%, which I
consider unlikely.

Past and Future Trades

I last took an in-depth look
at
New
Flyer
in
October 2009, when the stock was trading around $9
because the Chicago Transit Authority had delayed a large order and
thrown off production. I expected the company to work though
these problems, and advocated buying at that price.

Since then the stock rose as high as C$12 this February.
I began reducing my holdings when the price exceeded $11 mainly for
rebalancing, which left me with the capacity to purchase more as the
stock has fallen since March, making purchases at $10.50, $9, and
$8. I will probably make one more purchase if it falls as far as
$7. Despite the fact that the current price seems extremely cheap
for an income investment, the overall uncertainly and current general
market decline might conspire to drive it that low again.

No matter what the structure, New Flyer is an excellent value company
at the current price. I like the income security nature of the
current structure, and would be happy to hold the New Flyer IDS at
current prices even if the dividend is reduced to zero, but I'd also be
comfortable if New Flyer converts to a more traditional equity
structure. If the current IDS were somehow converted into
straight equity trading at the same price (C$7.79), the P/E ratio would
be about 8, after taking into account the reduced earnings due to the
loss of the interest tax shelter. (This tax shelter arises
because interest on the note is treated as an expense for tax purposes,
while dividends would not be.)

Although I expect the price to recover only slowly from whatever low it
finds, I don't see any reason to delay my purchases until it is back on
the upswing, since the current 15% yield seems an excellent
compensation for my investment.

DISCLOSURE: Long NFYIF.DISCLAIMER: Past performance is
not a guarantee
or a reliable indicator of future results. This article contains
the current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment
advice or a recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not guaranteed.

While Principal may not be providing enough information at the moment
to make an informed investment decision, I wanted to decide if the
roll-up strategy made sense in the solar developer space. To
do that, I talked to two sources actively involved in the space:
Stephen Irvin, the CFO of the privately held solar installer Namaste Solar in Boulder, CO,
and Rick Coen, principal at Empower
Solar
Consulting, a company that manages solar projects for clients
such as builders, real estate developers, and government entities who
have a few of the necessary ingredients (such as capital or real
estate) for a project, but lack the necessary technical or
organizational expertise.

Together, Irvin and Coen paint a mixed picture of the industry for
prospective developers. At the small, residential scale, there
are practically no barriers to entry. There is a wealth of
training material available, both in person and online which enables
even a one-man contractor to become certified to install solar.
At the larger, commercial scale, the main barrier to entry is capital,
not expertise. According to Coen, there is a national trend
towards the financiers owning the solar project, and consultants like
Empower can manage the project for them, and bring together all the
necessary expertise to develop a project from the initial site
assessment to final commissioning.

According to Irvin. the installer model looks a lot like a traditional
contractor model. Gross margins are thin, from 15 to 30%, with
residential systems typically receiving larger margins than
commercial. Both see space in the current climate for a wide
range of business models, driven by the immaturity of the industry and
a wide diversity and frequent complexity of local codes and utility
incentive programs that
contractors must negotiate.

There are also advantages to scale. According to Irvin, large
solar developers such as privately held Alteris Renewables have the
buying power to negotiate better prices on solar panels, a significant
advantage in a thin-margin business. Alteris was formed when
private capital firm Riverside Partners rolled up a bunch of companies
in the Northeast. He sees a shift towards commercial and utility
scale projects, which also favor large firms because they have the
balance sheet to provide the bonding capacity that large customers
expect.

Public Solar Installers

Based on the above discussion, I'd guess the sweet spot for a publicly
traded solar developer/installers would be a large scale, regional
company, focused on a promising region and possibly residential solar
installations (because of the higher margins.)

Promising markets include California, the Northeast, and Hawaii.
The former two have strong incentives, while Hawaii's expensive
electricity means that they are already close to grid parity.

Although not a complete list, here are the publicly traded installers
I'm aware of:

Real
Goods
Solar
(RSOL)
Real Goods calls itself a "leading residential and commercial solar
integrator" which was bought by sustainable retailer Gaiam (GAIA) in 2000, but spun
off again in 2008. According to Irvin, they used the money raised
in the IPO to "acquire 3 solar installers in California." They
also have a presence in Colorado, because of Gaiam's presence
there.
Real Goods reported a gross margin of 28.9% and their seventh
consecutive
quarter of profitability in Q1 2011, showing the effectiveness of the
large-scale residential focused model. I think the company
deserves deeper investigation.

Premier
Power
Renewable
Energy (PPRW.OB)
Premier Power was founded in 2001 as the solar arm of home builder
Premier Homes. Now they call themselves "a leading North American
and European solar power company providing
high performance solar panel systems with consistently high quality for
our commercial, agricultural, industrial, government, utility and
residential customers." Recent press releases show that they have
been completing large scale projects in California and Italy.

The company has a tiny $20M market cap, and an 8.2% gross margin on
$87M sales. They are marginally unprofitable, but they show
positive cash flow and no net debt, yet with their thin gross margins,
I don't anticipate a smooth or quick path to real profitability.

Envision
Solar
International
(EVSI.OB)
I first looked
at
Envision
a year ago, at which point they needed to raise capital
to build their business. They're now reporting a healthy 36%
gross profit margin, but on minuscule revenues of $347 thousand.
An atypical solar integrator, the focus on licensing "solar trees" and
other parking lot solar shading structures nationally. This may
account for the out-of line gross margins of a solar integrator, as
they focus mainly on engineering and leave the sale of solar panels to
third party installers. However, given that their revenues are
still a fraction of total expenditures (They lost $2.36M over the
trailing twelve month period), these margins may not persist as they
continue to scale their business.

Arco Energy
Technologies Corp. (ART.V)
Arco was brought to my attention by J Peter
Lynch after I wrote the initial version of this article. I
have not investigated the company, but here is their profile from their
website. "Acro Energy Technologies... is focused on the
consolidation and growth of renewable energy companies, initially in
the United States solar market. Acro Energy Technologies has initiated
its acquisition campaign in the solar integrator market through its
recent addition of Acro Electric, Inc., the 8th largest residential
solar integrator in California. Also, it has closed an asset purchase
agreement with Light Energy Systems in Concord, California. Acro Energy
continues to actively evaluate suitable acquisition candidates across
North America and Canada."

Conclusion

The examples of Real Goods and Alteris show that there is a role for
consolidators in the highly fragmented solar installer industry.
But not all consolidators will succeed, and those that do are more
likely to be steady cash earners, rather than high-flying growth
machines. Do not expect to see a Google of solar installers any
time soon, if ever.

If I were to invest in a solar developer today, the only real option
would be Real Goods. I'd need to do more analysis before doing
so, but the company's financial ratios and strength look
promising. My biggest concern
would be valuation, since solar installation is a traditional
low-margin business, but the glamour of solar is likely to attract
unsophisticated investors drawn to the flame of solar's bright
future. At $2.42, Real Good is trading at a pricey 34 twelve
month trailing P/E ratio, but an inexpensive forward P/E ratio of only
10. Yet forward P/E ratios only have meaning when (possibly
inflated) earnings expectations are met.

DISCLOSURE: No Positions.

DISCLAIMER: Past performance is
not a guarantee
or a reliable indicator of future results. This article contains
the current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment
advice or a recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not guaranteed.

June 09, 2011

Saudi Arabia to Become the Saudi Arabia of Solar Electricity

by Garvin Jabusch

A couple days ago Bloomberg
reported the following:
"Saudi
Arabia plans
to generate solar electricity equaling the amount
of its energy from crude exports, Oil Minister Ali Al-Naimi said."
Wait, what? That sounds like a ridiculous quantity of solar
electricity. The article doesn't say quantitatively how much energy
that is, so I did a quick check. Saudi Arabia exports about
2.7 billion barrels of oil per year, each containing the equivalent
of 1,700 Kilowatt hours of electricity for a total of 4.59 × 1012
KwH per year, or the equal of about one quarter or the world's
annual electricity
demand.

Okay, so obviously solar electricity equal to the energy in all of
Saudi Arabia's crude exports is far more than the Saudis could ever
use, so maybe I'm misunderstanding the Oil Minister's meaning. Except,
Bloomberg goes on to report that "Saudi Arabia, the world's largest oil
exporter, has the potential by 2020 to produce enough solar power to
meet more than four times global demand for electricity, al-Naimi
said." Okay, so it appears they really are planning to ramp up huge.
World leading huge. Region-or-more powering huge. A development plan
this ambitious can only mean that Saudi Arabia intends to become a huge
source of exportable electricity.

Why would the world's largest oil producer wish to so quickly become
the world's largest solar electricity exporter? I'm sure the
Saudi
leaders, looking around their country, had a conversation that started
with, "so, apart from our rapidly
depleting
oil reserves, what natural resource do we have that could be exploited
on an equally massive scale?" The Saudis of course realize the only
answer is sunlight. And knowing better than anyone that
easy-to-retrieve oil is getting scarce, they have made the strategic
decision to begin replacing it with their only other form of exportable
energy, the only other source they can produce in abundance as massive,
solar electricity. Saudi is making what in the medium to long term is
the state-saving, obvious transition to the Next
Economy. And they're doing it now while they're awash in enough oil
capital to make it happen.

If I'm right about their plan to export ridiculous quantities of
solar electricity, one of the next things we should see is investments
into transmission
capability (there are signs of this already, such as
the huge new General Electric(NYSE:GE)power
equipment
plant, and plans for underwater
power
cables
to Egypt). Is a quarter of global electricity demand within feasible
transmission range of Saudi Arabia? The Saudis would seem to think so.
Other things we'll begin to see are contracts with solar providers and
rising demand for materials all along solar industry verticals. Solar
stock short sellers: watch your backs.

June 08, 2011

When Will the Geothermal Power Slump End?

Of all the energy harvesting
technologies out there, geothermal remains the most maddening.

In theory, there should be more than enough energy below our feet to power our world, and it should be
cost-competitive for a fraction of the investment needed in wind or solar.

In theory.

Right now, the extraction of geothermal energy in the U.S. remains
tied to Nevada and California, where the heat is close enough to the
surface and in stable enough formations that a drill can reach it
without the heat dissipating quickly. This has caused investors to sour
on companies like Ormat Technologies Inc., that once made Reno
a hotspot for renewable energy.

In some ways, geothermal today is pretty boring, as with Ormat's Steamboat complex which
provides Reno with base load power. Push water down one well, pull it
up hot in another, run it through a turbine, extract the heat. Simple.

Google has invested $11 million in EGS, but in the way of a venture
capitalist, not an investment banker. EGS needs better drilling
techniques and it needs to become more cost efficient.

More ominously, EGS seems dependent on the same hydraulic fracturing
techniques being pushed for natural gas, oil, and oil shale, which have
become a red flag to environmentalists for the damage they can do to the water supply.

As a result Ormat
seems more active in the area of recovered energy generation (REG) than
geothermal.
An REG plant takes the unused energy from some other
industrial process and turns that heat into electricity in the same way
it would use Earth energy. Not as green, but it's the back-end, the
cutting edge of the process, and the knowledge of how to do this
efficiently is valuable.

These techniques could be useful in the oilpatch, which wastes tons
of power in the form of briny wastewater. An SMU conference this month will look into
exploiting that energy, using existing infrastructure. Most speakers,
like Suri Suryanarayana of Blade Energy Partners, and executives from GE and Pratt & Whitney, are interested in
adapting existing products and techniques to the generation of
electricity from oil industry waste.

One of the more interesting speakers will be Richard Langson, whose
Gas Letdown Generator (GLG) (right) gets power directly from the
pressure of natural gas wells at a price of just 4 kilowatts per penny.
Gas fields, oil fields, petrochemical and industrial waste plants, and
existing steam plants can all be making money using the GLG, he says.

But the GLG, if it's as good as Langson says, could be highly
disruptive. It could turn go-generation systems like Ormat's into
rather expensive horse-and-buggy systems, the Stanley Steamers of the 21st
century.

It would be nice to report that there's a clear investment
opportunity here, either in a publicly-traded geothermal company like
Ormat, in an EGS play, or in a co-generation device like that of
Langson. But it remains unclear which solutions will win.

What seems clear is that something will. Co-generation is going to
go into every factory producing heat, as costs for extracting it keep
going down, and the value of heat keeps going up. Oil companies are
going to remain interested in geothermal technologies that approximate
what they are doing now. Places with the largest supplies of
easily-tapped Earth heat, like Japan, are ripe for investment.

June 07, 2011

The Fukushima cloud's (green, not silver) lining

The ongoing tragedy of Japan's Daichi Fukshima nuclear complex will
prove to be a boon for renewable energy in Japan, and astute
investors should begin carefully to follow Tokyo's new priorities.

Before the March 11 twin disasters of a massive earthquake followed by
a devastating tsunami, about 30 percent of Japan's electricity was
generated by nuclear power, and Tokyo had ambitious plans to raise its
market share to 50 percent over the next two decades, with renewable
accounting for 20 percent, Japanese Prime Minister Naoto Kan told
journalists earlier last month.

That optimistic policy is now in tatters, and Kan added, "However
(following Fukushima), we now have to go back to the drawing board and
conduct a fundamental review of the nation's basic energy policy."

Kan is now touting the government's "Sunrise Project," which has been
moribund for the last seven years. The goal of the Sunrise Project is
to reduce the cost of solar power over the decade to a third of current
levels and to one-sixth by 2030 as an incentive for more people to
install it.

At the 50th anniversary of the Organization for Economic Cooperation
and Development in Paris Kan told reporters, "Japan will now review its
basic energy plan from scratch and is set to address new challenges."

The scale of the government's turn away from nuclear and fossil fuel
power is extraordinary, as currently renewable energy resources, such
as solar and wind, only make up about 1 percent of Japan's total power
supply. Even with hydropower, the ratio is about only 9 percent.

According to China Business the earthquake and tsunami halted
production at most of Japan's giant solar power companies, including Kyocera
(KYO), Sharp
Corp ADR (SHCAY.PK) and Sanyo
Electric (SANYY.PK) because of the subsequent lack of electricity.
Prior to the earthquake China and Japan essentially shared the European
photovoltaic (PV) market; since the earthquake analysts predict that
Japan will lose one quarter of its market share.

The shift has already started, as The Nikkei business daily reported on
Wednesday that Softbank Corp, Japan's third-largest mobile phone
operator, has announced plans to assist in the construction of about
ten 20-megawatt facilities, costing about 8 billion yen ($100 million)
each. But, as in many Western countries dominated by the nuclear and
oil industries, solar energy policies have up to now enjoyed fitful
support in Japan, where pioneers such as Sharp Corp and Kyocera Corp
have lost their lead to overseas rivals that received larger subsidies
and lower production costs. Furthermore, the cost of solar panel
installation in Japan is double that in Germany.

So, who will be one of the major beneficiaries of this policy shift
towards reducing solar costs?

China, surprise surprise.

China now has over 400 PV companies and now produces approximately 23
percent of photovoltaic products used worldwide. Three years ago China
produced 1,700 megawatts of solar panels, nearly half of the world
production of 3,800 MW, of which 99 percent were exported. According to
Huang Xinming, head of a research institute at JA
Solar (JASO), a large Chinese solar power company, JA Solar has
just developed a new technology that could cut the cost of producing
silicon, an important material in manufacturing solar panels, by 60
percent.

Expect to see a flood of yen into China's PV industries; smart Western
investors will head east as well, where the sun always rises.

The stock promptly dropped another 20+% and is trading for around $8 as
I write, down over 70% since the start of the year.

The Story So Far

The delayed annual report should not have caught investors by
surprise. When AMSC first announced that Sinovel
had not paid for previously delivered product and was refusing to
accept deliveries in early April, it was fairly clear that some
revenue recognition would have to be restated. That, after all,
was the main grounds for the several class action lawsuits which
promptly sprang up. So investors are selling simply because of
the increased uncertainty of not having new financial statements, not
because of new negative news.

The other piece of recent news was the
announcement on May 24 that Daniel McGahn,
AMSC's former President and COO, would be taking AMSC founder Gregory Yurek's place as CEO. Although
the board attempted to pass this off "as
part of the CEO succession plan that has been discussed with the Board
of Directors since late 2010", I'd be willing to bet that the
succession plan in question was significantly accelerated due to recent
events. In any case, Yurek will stay on as board chairman, and
McGahn is a company insider, so while this may represent a change in
emphasis for the company, it's no revolution.

When I first looked at AMSC after the Sinovel announcement, I thought
the company was a speculative
buy below $12, but quickly
changed my mind when I found out that Sinovel had been working to
establish a China-based competitor to AMSC. With the recent
sell-off I'm looking at the stock again, but with the immediate risk of
dilution as the company attempts to raise funds in order to complete
their acquisition
of The
Switch Engineering Oy ("The Switch"), it's
difficult to point to any price as a bottom, even if the company's
fundamental value is much higher.

Back of the Envelope Calculations

One reader suggested that AMSC's Dec 31 cash on hand of $4.79 might
serve as a useful floor for the stock price. However, that amount
represents only $243M, and any amount not needed to maintain operations
will almost certainly be used as part of "The Switch"
acquisition. The rest will either be raised in the form of debt,
or additional share offerings. At the current share price, I
expect that management will attempt to fund the rest of the acquisition
with debt, if they can find a bank or banks willing to make the
loan.

The company's book value per share was $9.86 on Dec 31, a number which
represents the cost paid to acquire the company's assets, minus any
depreciation. Book value is a notoriously inaccurate guide to the
current replacement cost of assets, and to the extent that these assets
are dedicated to servicing the needs of Sinovel, they may in fact be
worth much less than the company paid for them. Hence, it is also
difficult to place a floor under the possible stock price based on book
value.

Finally, we should consider future potential earnings as an indicator
of the company's value. In the June 1st press release, AMSC said
it "currently expects to reverse the
recognition of a material amount of revenue that it had included when
estimating revenues of "less than $355 million." With shipments
to Sinovel having not yet resumed two months into fiscal 2011, I think
it is reasonable to expect much lower revenues this year.

My current guess is that Sinovel will again accept shipments from AMSC
this year, but they will never return to former levels, and could
easily decline over time. I'm far from confident in this guess,
but given that Sinovel previously accounted for 70% of AMSC revenues, I
think a reasonable guess for revenue in FY 2011 would be on the order
of $150M (not including revenues attributable to "The Switch.")
Those revenues will come from any resumption of sales to Sinovel,
revenues to other customers (Sinovel was only 70%, after all) and
growth, especially from AMSC's eponymous superconducting
wire business.

If AMSC maintains their previous gross margin of 29%, $150M revenues
will translate into an operating profit of $43M, or an EBITDA of
$28M. If overhead were not reduced from last year, net loss would
be about $7M. But the company is working to reduce overhead, and
said that they had already reduced headcount by 10% in the June 1st
press release. Therefore, we can reasonably expect overhead to
fall, leaving the company near break-even or at a tiny profit.

If AMSC does not achieve a significant profit in 2011 as I'm guessing,
a reasonable way to value the company would be based on sales.
Here are the price/sales ratios of other publicly traded wind industry
players:

Given the uncertainly currently surrounding American Superconductor,
Broadwind and Zoltek are probably the better comparables than the
established companies Kaydon, Gamesa, and Vestas, so I will use a
prospective Price/Sales ratio of 1.0 to 1.3. Using my $150M
revenue estimate, we get a market capitalization of between $150M and
$200M.

The Switch acquisition was valued at € 190-million, or about
$273M at current exchange rates, and was supposed to be immediately
accretive to AMSC's sales. It seems reasonable that, to the extent that
the acquisition can be funded without outside funds, it should increase
AMSC's market cap. Given AMSC's cash on hand at the end of the
year of $243 million, I'm comfortable attributing another $200M market
cap to The Switch, for a total market capitalization of between $350M
and $400M. This translates to a stock price of between $6.90 and
$7.90.

Conclusion

Given the uncertainty in all my guesstimates and calculations, it may
already be time to pull the trigger on AMSC, given that the company
seems relatively fairly valued even if we assume (as I did in my
back-of-the-envelope calculation above) that most revenue from Sinovel
is gone for good. The recent response to their delayed annual
report has the feel of panic selling.

Yet panicking sellers do not pay much attention to valuations,
back-of-the-envelope or otherwise. Are you brave enough to try
and catch a falling knife?

DISCLOSURE: Long Gamesa.
Considering a near-term purchase of AMSC.

DISCLAIMER: Past performance
is
not a guarantee
or a reliable indicator of future results. This article contains
the current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment
advice or a recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not guaranteed.

June 04, 2011

An Elephant Hunter Explains Market Dynamics

John Petersen

Friday afternoon was a strange time for Axion Power International (AXPW.OB).
After trading 200,000 shares early in the day, Axion filed $28 million
mixed shelf registration with the SEC at about one o'clock and the
fly on the wall reported the filing within minutes. It seems that
some stockholders were spooked by the news and assumed that Axion would
sell stock right away instead of waiting for the fall deal season.
Their knee-jerk selling shoved another 1.1 million shares into the
market in three hours and made Friday the second heaviest trading day
in Axion's history.

When I saw the news I was pleased to learn that Axion plans to do its
next funding round as
a public offering instead of a private placement and is taking the
necessary steps to make that vision a reality. I guess the big
difference between me and the street is that I understand that filing a
shelf registration statement is a lot like applying for a hunting
license. It's the beginning of the financing process, not the end.
Since I've never seen a financing transaction go from start to finish
in less than 90 days, I don't believe a transaction is likely before
September.

All in all, yesterday reminded me of a Norville Barnes line from the
Coen Brothers comedy, The Hudsucker
Proxy:

– "Relax, it's only natural in a
period of transition for the more timid element to run for cover."

Elephant hunters live for times like these. They instinctively know
that sellers make themselves irrelevant when they hit the sell button
and from that point on the only thing that matters are the buyers
because they're the ones who'll determine the future stock price. Since
Friday afternoon was such a crazy time, I'm going to step out of my
normal comfort zone, try to explain how markets for individual
securities develop and function, and offer a bit of advice from a
professional with 30 years in the trenches. I can only hope that
somebody besides me will find the discussion interesting.

Stock markets are simple creatures that always obey the laws of supply
and demand. Each trade has two sides – a willing seller and a willing
buyer. When sellers outnumber buyers prices fall. When buyers outnumber
sellers prices rise. When sellers and buyers are balanced prices remain
stable. No matter what direction a stock is heading, the root cause
always boils down to the balance between buyers and sellers.

There are two basic types of public companies; earnings-driven
companies that are “bought” in the top-tier "weighing machine" markets
and event-driven companies that are “sold” in the lower-tier "voting
machine" markets.
Bought stocks are well covered by analysts, trade on the basis of
earnings, offer moderate to high levels of security and have
predictable trading ranges that approximate fair value. Sold stocks
draw little attention from analysts, trade on news and events, offer
little or no security and tend to have volatile and unpredictable
trading patterns. Both types of companies are essential to a healthy
economy but they're not necessarily appropriate for every investor.

There are also two basic types of stock market investors; hot money and
patient money. Hot money buys a security with a relatively short
investment horizon and relatively modest performance goals. The
archetype of hot money is the day trader who buys in the morning and
sells before noon to pay for his lunch. Patient money, on the other
hand, buys with a longer investment horizon and more ambitious goals.
The archetype of patient money is Warren Buffett who takes forever to
make an investment decision but almost never sells. Every investor
needs to know his own style and pick his investments accordingly
because the surest way to lose money is to invest patient in a hot
stock or invest hot in a patient stock.

The most useful mental image I've found to describe a market for a
particular company is three barrels sitting side by side. The barrel in
the center represents willing sellers. The barrel on the
left represents the hot money buyers.
The barrel on the right represents the patient money buyers. Every time
a sell order is placed, new shares move into the center barrel. Every
time a buy order is filled, those shares move out of the center barrel
and into either the right or the left hand barrel. Market makers will
theoretically buy stock and hold it in inventory, but those inventories
are rarely substantial.

Elephant hunters are by definition patient. We buy stocks that are
fundamentally sound, but unknown or unloved, and hold them until
something happens that changes the market's perceptions and
expectations and creates new buying demand. We avoid stocks that are
favorites of the hot money crowd. Over time, as elephant hunters
congregate in a particular stock, the patient money barrel tends to get
very full while the hot money and willing sellers barrels tend to run
dry. When those two cheap and easy supply barrels run dry and an event
occurs that drives new buying demand, the market price must rise to a
level where some of the elephant hunters are willing to lighten up and
take a profit.

It takes years to learn how to screen stocks and figure out whether
they appeal primarily to hot money or patient money. It can take
decades to learn how to trade intelligently. Some tricks and tools that
I've found useful over the years include:

Divide the public float by the 3
month average trading volume. This calculation tells you the
number of days required to trade the entire float. Companies that trade
their entire float more than six times a year are usually hot money
favorites. Companies that trade their float less than four times a year
are usually patient money favorites.

Track moving average volumes.
Everybody watches moving average prices. In my experience a more useful
tool is a medium- to long-term moving average volume analysis.
My favorite periods are 50-days, 100-days and 200-days because they
tend to eliminate the spikes, clarify the trends and isolate cases of
consistent accumulation over time. If you can find a stock that has a
relatively stable price and steadily increasing volume it's a sure sign
that the elephant hunters are doing their thing.

Look for upcoming events that
will matter to outsiders. Between bulletin boards and financial
websites investors can drill down into detailed information on almost
any stock or sector that interests them. Unfortunately blogs like mine
appeal to a very limited audience and the events that move stocks are
ones that are important enough to draw the attention of people who've
never heard of the "thought leaders" in a sector.

Don't buy a stock unless you can
write a full page on why you want to own it. Far too many
investors fall into the trap of the hot tip or the neighborly advice
without understanding what they're buying. If you can't write a
detailed explanation of why you own a stock, you shouldn't own it.

Don't buy more than you can
sleep with. It's easy to fall in love with a story or an idea
and we all develop odd emotional attachments to our favorite stocks. No
investment is worth an hour of lost sleep.

Take little profits on the way up.
Nobody ever lost money by leaving something on the table for the next
buyer. Some of my most painful losses over the years have come from
reaching for the brass ring on my whole position. There is no better
feeling in the world than buying a position, selling enough to recover
your out-of-pocket cost, and swinging for the fences on the house's
money.

Devote as much effort to selling
decisions as you do buying decisions. The financial press is
full of stories about how a $10,000 IPO investment in WalMart would be
worth a bojillion dollars today. The reality is that there are very few
WalMart bojillionaires because most of the IPO investors sold too soon.
The reason is people don't spend enough time analyzing selling
decisions. Even if you have a big gain on a stock, profit for its own sake is the
worst reason to sell because then you'll be left with a wad of cash
that you have to put to work somewhere else. Making a pile on Company X
and then losing it all on Company Y is a far more common story than
most will admit.

Remember Warren's Wisdom.
"Investors should remember that excitement and expenses are their
enemies. And if they insist on trying to time their participation in
equities, they should try to be fearful when others are greedy and
greedy when others are fearful."

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and owns a substantial long position in its common stock.

June 03, 2011

Financial Innovation is Blowin' in the Wind

Wind power is cheap, clean, uses no water, and emits no
pollutants. Yet wind is far from a perfect source of electricity,
since the wind blows when and where it will.

While wind power will never be as constant as baseload power,
geographic diversification and better dispatch procedures can go a long
way to
mitigate the problems to utilities caused by wind's variability.
Yet wind farm developers and financiers are at the mercy of the weather
in their particular location. Not only does wind output swing
significantly from day to day and season to season, wind output can
also vary greatly from year to year. Farm owners also have to
worry that some of their turbines might need maintenance just when the
winds are at their best. This can lead to unpredictability of
wind farm revenues, which in turn makes wind farms more expensive to
finance.

Two recent announcements go a long way to solving these problems for
wind farm developers and owners.

First, on May 19th, energy risk analysis leader 3TIER and weather risk management
firm Galileo announced
that they would be offering financial products to hedge the risk of
wind variability. With cash payouts based on 3TIER's leading wind
resource data, Galileo can offer to mitigate the cost to wind farm
developers for a premium which can be expected to be much less than the
risk premium charged by project financiers who do not have the
expertise to assess wind resource risk as well as Galileo and 3TIER,
and who also seldom have large and geographically diverse enough
portfolios of wind investments to accept such risks at a price that is
affordable for many wind farm developers.

Together, these two financial innovations could do as much to reduce
the cost of wind power and increase the pace of wind farm development
as years' worth of technical innovation developing better wind turbines.

DISCLAIMER: Past performance is
not a guarantee
or a reliable indicator of future results. This article contains
the current opinions of the author and such opinions are subject to
change without notice. This article has been distributed for
informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment
advice or a recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not guaranteed.

June 02, 2011

Trina Solar Factory Tour: Addressing Environmnetal & Quality Concerns

This article is part of a multi-part
series published at Renewable Energy World. You can read
the other parts here: one, two, three, and four.

The Trina
Solar (TSL) factory tour and testing facility tour is over. It took
perhaps an hour, maybe less.

The next stop is a small auditorium where Ben Hill, Trina’s VP of
sales, gives us a PowerPoint presentation that includes Trina’s
history, market share, company philosophy, and their Formula 1 racing
branding initiative. Afterward, Trina’s CEO, Jifan Gao, appears,
and we are able to ask him questions through a translator.

What I want to know about is maintaining quality control, their
sustainability practices, potential manufacturing in the U.S., not to
mention how Trina will address solar PV commoditization. (Due to the
long length of this post, I’m saving this subject for my next and final
Solar Fred in China post.)

On Chinese Quality Concerns

Throughout my trip, I’ve heard nasty stories here in China about
manufacturers taking shortcuts and not manufacturing to specs,
especially for foreign companies moving their manufacturing here. My
travels in Shanghai allowed me to talk to several people in a number of
industries, and all had similar stories of shortcuts and poor quality
from suppliers. If you check the comments section of my second China post,
there are several solar examples from readers. However, based on this
press conference and other outside reports, it’s clear that Trina
doesn't have these issues. Why?

First of all, Trina is a Chinese company. That means they don’t need
anyone to translate or facilitate anything, and they are well aware of
problems with outside suppliers and QC manufacturing issues. Their
solution to supplier QC is to, well…have as few suppliers as possible
and to keep the remaining suppliers as close as possible. That is,
Trina’s a vertically integrated company; from solar ingots to wafers to
modules, they own it. So if Trina’s taking shortcuts, they’re only
shortcutting themselves. The only thing they don’t supply is the raw
silicon, glass, and a few other minor components, but even there, Trina
is encouraging these suppliers to be manufacturing on campus or near
their huge solar PV park in Changzhou.

Beyond that, the company already scores high on outside benchmark
tests, such as Photon International’s
ongoing module output test of major PV brands. Trina’s 180w randomly
selected module is in 4th place after two years of STC output. Plus, as
mentioned in my last China post, Trina’s well known to be
“bankable,” and banks have far better due diligence than our factory
tour and press conference.

On Environmental Concerns

Making solar PV wafers and modules ain’t pretty. There are a lot of
toxic, non-yummy chemicals and waste water in the manufacturing process
that nobody would want added to their drinking water or crops. In 2008,
there was a Washington Post report
about a solar PV manufacturer dumping PV waste chemicals into the
ground and rivers outside the solar factory, poisoning residents and
farms.

To their credit, Trina is conscientious and transparent about their
environmental efforts. They’ve reportedly invested more than $12
million in recycling programs, reduced electricity consumption in all
workshops, switched to low-consumption lights, shortened cycle time for
selected machines, and invested over $80 million in sustainable
manufacturing. Part of that money went toward building a new waste
water plant with a capacity of 10,000 tons/day, potentially recycling
60% of all water from the manufacturing process.

As to the overall carbon footprint per module, Hill tells us they’re
in the process of calculating that figure. Once they know what that
number is, Trina says it is committed to reducing it.

In our press conference of 30 international reporters, Trina’s CEO,
Jifan Gao, got the same question at least three times, including one
from a Chinese reporter. The question: “When are you going to build a
factory in my country?” Or, in the case of the Chinese
reporter, the question was, “When are you going to build a factory in
my region?”

It’s flattering to be so desired, no? In any case, Trina is a
publicly traded company, so Gao’s (translated) answer was thoughtful,
but vague enough not to move Trina’s stock price in any direction. And
that answer was essentially that Trina is always assessing customer
needs in each country. If a particular market needs a new factory
and
Trina can swing it and produce modules at a competitive price, then
they’ll build a factory there.

In other words, Trina’s open to building a factory in
fill-in-the-blank-country/region—but there are currently no plans. For
now, they have a total of 17,000 employees worldwide, 13,000 of which
are in Changzhou, and they said their workforce is still growing
globally.

I speak with other Trina executives later, who tell me that as much
as customers want American energy independence, they rarely ask for a
made-in-America panel. Price is their first consideration. Politicians
who support or oppose solar policies don’t see it that way, of course.
I’ll have more thoughts about this in my next and final China post.

Until then, UnThink Solar.

Tor Valenza a.k.a. “Solar Fred” advises solar companies on
marketing, communications, and public relations. Contact him
through UnThink
Solar or follow him on Twitter @SolarFred.

DISCLOSURE: Trina is NOT a client, but did pay the expenses for me
and about 30 other reporters to visit their factory.

June 01, 2011

Plug-in and Hybrid Locomotives; Another Sweet Spot for Axion Power

John Petersen

I'm a cynic and a heretic when it comes to plug-in vehicle schemes
because most defy the laws of economic gravity and violate a cardinal
rule that
Ford engineers developed for the EcoStar light
delivery vehicle program in the early '90s:

– The unloaded
weight of a plug-in vehicle should never exceed 70% of its loaded
weight.

Investors who pay attention to this simple rule can easily distinguish
between pipe-dream vehicle electrification schemes that are nothing
more than feel-good
eco-bling and realistic vehicle electrification projects that make
economic sense.

For the last few weeks I've been studying a technology partnership
between Norfolk Southern (NSC)
and
Axion Power International (AXPW.OB)
that
is developing cost effective battery and hybrid electric drive
retrofit systems for railroad locomotives. After extensive research
I've decided that battery and hybrid electric locomotives are
applications that even a heretic can
love because:

Vehicle weight to cargo weight ratios range from good to
extraordinary;

Like e-bikes, stop-start idle elimination and hybrid electric vehicles,
battery and hybrid electric locomotives are clean fuel efficiency
technologies that just make sense.

The Green Goat

The first hybrid electric switching
locomotive was introduced in 2004 by Railpower Technology and called
the "Green Goat." It replaced the 1,750 hp diesel engine in a General
Motors EMD GP9
locomotive with a 290 hp diesel generator
and 60,000 pounds of lead-acid batteries that offered a combined power
output of 2,000 horsepower. The Green Goat's core strengths were a $750,000
price
tag that compared favorably with the $1.5 million price of a
new switching unit and a battery dominant hybrid electric drive
promised fuel savings of 40% to 60%. Subsequently, Railpower launched a
smaller version called the "Green Kid" that offered a combined power
output of 1,000 horsepower.

In a year
long
field trial by IDC Distribution Services, the operator of an
inter-modal port facility in British Columbia, the Green Kid logged 3.6
million feet of switching operations over 2,347 hours, saved 10,450
gallons of diesel fuel, and reduced CO2, CH4
and N2O emissions by 53% compared to a conventional
switching locomotive.

Initially, the Green Goat was well received and railroads including
BNSF, Union Pacific (UNP)
and
Canadian Pacific (CP)
ordered a combined total of 175 units. Despite the initial marketing
successes, the Green Goat had significant battery problems and only 55
units were delivered before Canadian Pacific returned four units and
canceled the balance of a 35-unit order citing unsatisfactory
performance. The company went bankrupt in 2009 and emerged
as a subsidiary of the RJ Coleman Co. that no longer builds the Green
Goat.

The NS 999

In 2009, Norfolk
Southern unveiled an experimental electric switching locomotive
that it built in cooperation with the Department of Energy, the Federal
Railroad
Administration and Penn State University with the aid of a $1.3 million
Federal grant. Unlike the Green Goat, the NS 999 draws all its power
from an array of 1,080 lead-acid batteries that provide a power output
of 1,500 horsepower. The project's goal was to demonstrate the
feasibility of a plug-in battery powered locomotive that would
eliminate direct rail yard emissions and save up to 50,000 gallons of
diesel fuel per year.

During initial
trials
with 80% of its batteries connected, the NS 999 "operated a full switcher shift, at one
point pulling 2,200 tons of rail cars on an uphill track – without
using a sanding system, which helps locomotives gain traction. After
the shift, the four-axle locomotive had enough juice in its 12-volt
batteries to run two more eight-hour shifts." Like the Green
Goat, however, the NS 999 ran into battery performance issues that had
Norfolk Southern evaluating lithium-ion batteries, nickel-based
batteries and advanced lead-acid batteries in a matter of weeks. In
June of 2010 Norfolk made its battery technology selection and
recruited Axion Power to develop a new battery management system and
integrate its disruptive PbC battery technology into the NS 999.
The project is scheduled for completion later this year.

In addition to the NS 999 project, Norfolk Southern is working with
Axion to develop a retrofit hybrid drive system for multi-purpose
locomotives that will use 1,600 to 1,700 PbC batteries to improve fuel
economy in long distance freight transportation. A prototype is
expected by next spring.

The Battery Problem

The fundamental battery problem encountered by both the Green Goat and
the NS 999 is a chemical process known as negative electrode sulfation.
During discharge, a lead-acid battery's electrodes are partially
dissolved and lead sulfate is created. During charging, the bulk of the
lead sulfate gets dissociated and redeposited on the electrodes. In
practice complete dissociation of lead sulfate never happens. Instead,
a portion of the lead sulfate is deposited on the negative electrode in
the form of hard crystals. As the number of cycles increases so does
the level of crystallization. When the crystal build up is extreme, the
battery fails. The following electron micrographs show how sulfation
increases over time in a shallow-cycle partial state of charge
environment.

The PbC Solution

Axion's patented PbC battery is a hybrid device that uses conventional
lead plates for the positive electrodes and carbon electrode assemblies
for the negative electrodes. The PbC is technically classified as an
asymmetric ultracapacitor. Due to its unique architecture, the PbC does
not experience negative electrode sulfation. It also offers
significantly higher charge and discharge currents than a conventional
lead-acid battery. In a shallow cycling environment like the Green
Goat, prototype PbC batteries have demonstrated the ability to
withstand tens of thousands of cycles without degradation. In a deep
cycling environment like the NS 999, prototype PbC batteries have
demonstrated the ability to withstand up to 2,000 cycles at a 100%
depth of discharge without battery damage.

After several years of working with alpha and beta prototypes of its
PbC electrodes and electrode fabrication processes, Axion is just now
completing the installation, optimization and certification of its
first commercial electrode fabrication line. While it has not launched
a commercial product yet, that launch is expected later this year.

The Business Opportunity

North America's Class I Railroads operate a combined fleet of
approximately 1,500 switcher units that each burn about 50,000 gallons
of diesel fuel per year. The average switching locomotive is 30 to 40
years old and was manufactured during an era when emissions control
regulations were far less stringent than they are today. As a result of
new EPA regulations and a variety of state air quality initiatives, the
railroads are under intense pressure to reduce N2O and
particulate emissions in their switching yards, which are often located
in heavily populated urban areas.

Based on a recent report to the California
Air
Resources Board, it appears that the cost of bringing an old
locomotive up to current standards is roughly equivalent to the cost of
converting an old locomotive from diesel-electric to battery powered
electric. While an emissions abatement upgrade will improve fuel
economy through the application of newer technology, a battery retrofit
can eliminate all direct emissions and fuel consumption. Based on a
current off-road diesel price of $3 per gallon and an estimated fuel
consumption of 50,000 gallons per year, a battery retrofit should offer
a payback period in the three to four year range. In comparison, the
payback period for an emissions abatement upgrade will be closer to ten
years. The long-term revenue potential of retrofitting a portion of the
switcher fleet to run on batteries isn't a company maker, but it's a
darned good start.

The Voting Machine

Over the last year Axion's stock price has stagnated in the $0.50 to
$0.75 range as shares that were sold in December 2009 moved from
relatively weak hands to stronger hands. While I've responded to
countless comments and questions from readers, many have missed the
crucial fact that Axion is focused on completing the development of its
technology, rather than marketing a fully developed product. It's never
had a marketing team and except for the odd technical presentation at
industry events, its selling efforts have been non-existent.

Despite a lack of marketing for a development-stage product that wasn't
ready for commercial use, Norfolk Southern found the path to New Castle
because it was looking for a cost-effective solution to a critical
performance problem that could not be solved with conventional
lead-acid batteries. Based on its own technical evaluation of the
prototype PbC batteries Axion was able to make in 2009, Norfolk
Southern hired Axion to design and build a new battery management
system that would facilitate the integration of PbC batteries into the
NS 999. After about eighteen months of working with the technology, the
refurbishing project for the NS 999 continues apace. If there was any
substantial reason to believe the PbC would not stand up to the rigors
of the NS 999, Norfolk Southern would have terminated its relationship
with Axion long ago. The same can be said for BMW which also found the
path to New Castle because it was looking for a cost-effective
solution to a crucial performance problem that could not be solved with
conventional lead-acid batteries.

In its last quarterly report, Axion disclosed that it had received
notification from the Department of Energy that a grant application
under the Vehicles Technology Program had passed the first round of
criteria testing and advanced to the final round of review. In its last
conference call, management told participants that the grant
application identified Axion as the prime contractor, and included a
top-three US automaker, a research university and a national laboratory
as subcontractors. While details of the application will remain
confidential until a funding decision is made, it appears that this
time around a first tier US automaker has found the path to New Castle
because it was looking for a cost-effective
solution to a critical performance problem that could not be solved
with conventional lead-acid or lithium-ion batteries.

Given the mainstream media's infatuation with lithium-ion batteries,
the voting machine that is the market does not want to believe the PbC
will be a disruptive energy storage technology. When I consider the
growing parade of world-class companies that found the path to New
Castle before Axion even had a product to sell, I have to believe there
is more substance to the PbC than even I understand.

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and
holds a substantial long position in its common stock.